p2 gp2 #9lsbf.aimsapp.com/aimsweb/learnresource/gid14906182-p2... · 2016-09-18 · presentation of...
TRANSCRIPT
8
Questio
n
June 2013
Dec 2013
June 2014
Dec 2014
June 2015
Sep 2015
Dec 2015
March 2016
June 2016
Sep 2016
1
Group
Consol /
Cashflo
w
Trailer
D-Shaped Grp
CSOFP with
precemeal
acquisitio
n,
FRS 39, 1
6,
37, 1
9,
Proportio
nate
Goodwill a
nd
Ethics
Angel
CSOCF
Definitio
n of
C&CE and
Ethics
Marchant
Fello
w Subsi
CSOPL & OCI
with
disposal
to Subsi &
Assc
FRS 19, 1
6,
102, 3
9
Fair V
alue and
Ethics
Joey
Fello
w Subsi
CSOFP with
piecemeal
acquisitio
n
FRS 16, 1
05,
102, 2
4
Ethics
Kutchen
Fello
w Subsi
CSOFP with
acquisitio
n and
disposal in
S1’s Book and
Proportio
nate
Goodwill b
y S1
FRS 108, 1
7, 3
6,
12, 3
7, 1
03 and
Ethics
Fello
w Subsi
CSOPL & OCI
Piecemeal
acquisitio
n and
disposal to
Assc
FRS 36, 1
6, 4
0,
102, 2
8, 1
09
and Ethics
Bubble
Fello
w Subsi
CSOFP with
Foreign Subsi
FRS 109, 1
6, 4
0,
19, 2
1 and
Ethics
D-Shaped Grp
CSOFP with
Piecemeal A
cq
and Partia
l Goodwill a
nd
Impairment
FRS 2, 3
7, 1
6,
40, 2
7, 1
09
Weston
CSOCF
No SOCE given
Discontin
ued
operatio
ns,
Integrated
Report,
Ethics
Fello
w Subsi
CSOFP
cal FV of N
CI,
FRS 36, F
RS 17
sale &
leaseback, F
RS
108, 3
7, 1
10.
Dire
ctor’s ethics.
2
Focused
/ Mixed
Verge
FRS 108
FRS 18
FRS 37
FRS 16
FRS 20
Havanna
FRS 18
FRS 105
FRS 17
Aspire
FRS 21
FRS 12
FRS 103
FRS 39
Coatm
in
FRS 24
FRS 109
FRS 39
Yanong
FRS 113
FRS 41
FRS 102
FRS 16
FRS 16
FRS 37
Chemclean
FRS 38
FRS 110
FRS 103
FRS 2
FRS 12
Mehran
FRS 113
FRS 38
FRS 109
FRS 12
FRS 37 re
org
FRS 108
FRS 12
FRS 21
FRS 12
FRS 115
3
Mixed
Janne
FRS 40
FRS 17
FRS 105
Bental
FRS 110
FRS 39
Minco
FRS 18
FRS 38
FRS 37
FRS 36
Kayte
FRS 103
FRS 110
FRS 16
Klancet
FRS 108
FRS 38
FRS 102
FRS 38
FRS 103
FRS 1
Gasnature
FRS 111
FRS 16
FRS 109
FRS 10
FRS 17
FRS 105
FRS 37
FRS 16
Emcee
FRS 23
FRS 38
FRS 24
FRS 8
FRS 10
FRS 105
FRS 109
4
Current
Issues /
Focused
Lizzer
Disclosure in
Annual R
eports
FRS 107
Zack
FRS 8
Avco
FRS 32
Estoil
FRS 36
Cloud
FRS 1
FRS 109
Tang
FRS 115
Pod
Move to
new
IFRS,
Impairm
ent o
f
NCA and DTA,
FRS 38
Indefin
ite life
FRS 17
Flaws of curre
nt
FRS 17
Materia
lity,
Integrated
Reportin
g,
Cashflow
CHAPTER 7 – CONSOLIDATION
330
CHAPTER CONTENTS DIAGRAM
FRS 27 Separate Financial Statements
If Control Exist (>50% votes)
If Jointly Control (50% votes)
If Significant Influence
(20%-49% votes)
If Simple Investment Exist (1%-19% votes)
FRS 110 Consolidated
Financial Statements
FRS 111 Joint Arrangements
FRS 109 Financial Instruments
(See Chapter 3)
If Joint Ventures
FRS 103 Business Combinations
FRS 28 Investments in Associates and
Joint Ventures
FRS 112 Disclosure of Interests in Other Entities
CHAPTER 7 – CONSOLIDATION
331
CHAPTER CONTENTS
FRS 27 SEPARATE FINANCIAL STATEMENTS ------------------------ 332
FRS 110 CONSOLIDATED FINANCIAL STATEMENTS ---------------- 333
FRS 111 JOINT ARRANGEMENTS -------------------------------------- 340
FRS 28 INVESTMENT IN ASSOCIATES AND JOINT VENTURES ----- 342
FRS 112 DISCLOSURE OF INTERESTS IN OTHER ENTITIES -------- 344
FRS 103 BUSINESS COMBINATIONS --------------------------------- 346
1. COMPLEX GROUPS 360
2. PIECEMEAL ACQUISITIONS 364
3. DISPOSALS 381
4. FOREIGN SUBSIDIARIES 395
CHAPTER 7 – CONSOLIDATION
332
FRS 27 SEPARATE FINANCIAL STATEMENTS
This Standard was issued on 31 August 2012 (superseded 20 September 2011) and
is effective for annual periods beginning on or after 1 January 2014. Earlier
application is permitted. If an entity applies this Standard earlier, it shall disclose
that fact and apply FRS 110, FRS 111, FRS 112 Disclosure of Interests in Other
Entities and FRS 28 (as amended in 2011) at the same time.
This Standard is issued concurrently with FRS 110. Together, the two FRSs
supersede FRS 27 Consolidated and Separate Financial Statements (June 2009).
Scope
This Standard shall be applied in accounting for investments in subsidiaries, joint
ventures and associates when an entity elects, or is required by local regulations, to
present separate financial statements.
Definition
Consolidated Financial Statements are the financial statements of a group in
which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.
Separate Financial Statements are those presented by a parent (ie an investor
with control of a subsidiary) or an investor with joint control of, or significant
influence over, an investee, in which the investments are accounted for at cost or in
accordance with FRS 109 Financial Instruments.
Presentation of Separate Financial Statements
When an entity prepares separate financial statements, it shall account for investments in subsidiaries, joint ventures and associates either:
(a) at cost, or (b) in accordance with FRS 109.
The entity shall apply the same accounting for each category of investments.
Investments accounted for at cost shall be accounted for in accordance with FRS
105 Non-current Assets Held for Sale and Discontinued Operations when they are
classified as held for sale (or included in a disposal group that is classified as held
for sale). The measurement of investments accounted for in accordance with FRS
109 is not changed in such circumstances.
An entity shall recognise a dividend from a subsidiary, a joint venture or an
associate in profit or loss in its separate financial statements when its right to
receive the dividend is established.
CHAPTER 7 – CONSOLIDATION
333
FRS 110 CONSOLIDATED FINANCIAL STATEMENTS
This Standard was issued on 31 August 2012 (superseded 20 September 2011) and
is effective for annual periods beginning on or after 1 January 2014. Earlier
application is permitted. If an entity applies this FRS earlier, it shall disclose that
fact and apply FRS 111, FRS 112, FRS 27 Separate Financial Statements and FRS
28 (as amended in 2011) at the same time.
This FRS does not deal with the accounting requirements for business combinations
and their effect on consolidation, including goodwill arising on a business
combination (see FRS 103 Business Combinations).
Scope
A parent need not present consolidated financial statements if it meets all the following conditions:
(i) it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;
(ii) its debt or equity instruments are not traded in a public market (a domestic or
foreign stock exchange or an over-the-counter market, including local and
regional markets);
(iii) it did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and
(iv) its ultimate or any intermediate parent produces consolidated financial
statements that are available for public use.
CHAPTER 7 – CONSOLIDATION
334
Investment Entities: exception to consolidation An investment entity shall not consolidate its subsidiaries or apply FRS 103 when it obtains control of another entity. Instead, an investment entity shall measure an
investment in a subsidiary at fair value through profit or loss in accordance with FRS 109.
However, if an investment entity has a subsidiary that provides services that relate to the investment entity’s investment activities, it shall consolidate that subsidiary and apply the requirements of FRS 103 to the acquisition of any such subsidiary.
A parent of an investment entity shall consolidate all entities that it controls,
including those controlled through an investment entity subsidiary, unless the
parent itself is an investment entity.
Determining whether an entity is an Investment Entity A parent shall determine whether it is an investment entity. An investment entity is an entity that:
(a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;
(b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and
(c) measures and evaluates the performance of substantially all of its
investments on a fair value basis.
An investment entity has the following typical characteristics:
(a) it has more than one investment;
(b) it has more than one investor; (c) it has investors that are not related parties of the entity and
(d) it has ownership interests in the form of equity or similar interests
Control
An investor controls an investee 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. Thus, the principle of control sets out the following three elements of control:
(a) power over the investee; (b) exposure, or rights, to variable returns from involvement with the investee;
and
(c) the ability to use power over the investee to affect the amount of the
investor’s returns.
CHAPTER 7 – CONSOLIDATION
338
Kayte (Dec 2014 Q3)
(a) Kayte operates in the shipping industry and owns vessels for transportation.
Additionally, Kayte had borrowed heavily to purchase some vessels and was struggling to meet its debt obligations. Kayte had sold some of these vessels but in
some cases, the bank did not wish Kayte to sell the vessel. In these cases, the vessel was transferred to a new entity, in which the bank retained a variable interest based upon the level of the indebtedness. Kayte’s directors felt that the entity was a subsidiary of the bank and are uncertain as to whether they have
complied with the requirements of FRS 103 Business Combinations and FRS 110 Consolidated Financial Statements as regards the above transactions. (4 marks)
Required: Discuss the accounting treatment of the above transactions in the financial
statements of Kayte. Note: The mark allocation is shown against each of the elements above.
CHAPTER 7 – CONSOLIDATION
340
FRS 111 JOINT ARRANGEMENTS
This Standard was issued on 31 August 2012 (superseded 20 September 2011) and
is effective for annual periods beginning on or after 1 January 2014. Earlier
application is permitted. If an entity applies this FRS earlier, it shall disclose that
fact and apply FRS 110, FRS 112, FRS 27 Separate Financial Statements and FRS
28 (as amended in 2011) at the same time.
The FRS supersedes FRS 31 Interests in Joint Ventures and INT FRS 13 Jointly
Controlled Entities—Non-Monetary Contributions by Venturers.
Scope
This FRS shall be applied by all entities that are a party to a joint arrangement.
The FRS is to be applied by all entities that are a party to a joint arrangement. A
joint arrangement is an arrangement of which two or more parties have joint control. The FRS defines joint control as the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities
(ie activities that significantly affect the returns of the arrangement) require the unanimous consent of the parties sharing control.
The FRS classifies joint arrangements into two types—joint operations and joint
ventures.
Joint Arrangement
A Joint Arrangement is an arrangement of which two or more parties have joint control where require the unanimous consent of the parties sharing control.
A joint arrangement has the following characteristics: (a) The parties are bound by a contractual arrangement.
(b) The contractual arrangement gives two or more of those parties joint control
of the arrangement.
A joint arrangement is either a Joint Operation or a Joint Venture.
The classification of a joint arrangement as a joint operation or a joint venture
depends upon the rights and obligations of the parties to the arrangement.
CHAPTER 7 – CONSOLIDATION
342
FRS 28 INVESTMENT IN ASSOCIATES AND JOINT
VENTURES
This standard was issued on 31 August 2012 (superseded 20 September 2011) and
applies for annual periods beginning on or after 1 January 2014. Earlier application
is permitted. If an entity applies this Standard earlier, it shall disclose that fact and
apply FRS 110, FRS 111 Joint Arrangements, FRS 112 Disclosure of Interests in
Other Entities and FRS 27 (as amended in 2011) at the same time.
This Standard supersedes FRS 28 Investments in Associates (as revised in 2004).
Scope
This Standard shall be applied by all entities that are investors with joint control of,
or significant influence over, an investee.
Significant Influence
If an entity holds, directly or indirectly (eg through subsidiaries), 20 per cent or
more (but less than 50 per cent) of the voting power of the investee, it is presumed
that the entity has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not
control or joint control of those policies.
Equity Method
The equity method is a method of accounting whereby the investment is initially
recognised at cost and adjusted thereafter for the post- acquisition change in the
investor’s share of the investee’s net assets. The investor’s profit or loss includes its
share of the investee’s profit or loss and the investor’s other comprehensive income
includes its share of the investee’s other comprehensive income.
An entity uses the equity method to account for its investments in associates or
joint ventures in its consolidated financial statements. An entity that does not have
any subsidiaries also uses the equity method to account for its investments in
associates or joint ventures in its financial statements even though those are not
described as consolidated financial statements. The only financial statements to
which an entity does not apply the equity method are separate financial statements
it presents in accordance with FRS 27 Separate Financial Statements.
CHAPTER 7 – CONSOLIDATION
344
FRS 112 DISCLOSURE OF INTERESTS IN OTHER ENTITIES
This standard was issued on 31 August 2012 (superseded 20 September 2011) and applies for annual periods beginning on or after 1 January 2014. Earlier application
is permitted.
An entity is encouraged to provide information required by this FRS earlier than
annual periods beginning on or after 1 January 2013. Providing some of the
disclosures required by this FRS does not compel the entity to comply with all the
requirements of this FRS or to apply FRS 110, FRS 111, FRS 27 (as amended in
2011) and FRS 28 (as amended in 2011) early.
Objective
The objective of this FRS is to require an entity to disclose information that enables users of its financial statements to evaluate:
(a) the nature of, and risks associated with, its interests in other entities; and
(b) the effects of those interests on its financial position, financial performance
and cash flows.
Scope
This FRS shall be applied by an entity that has an interest in any of the following:
(a) subsidiaries
(b) joint arrangements (ie joint operations or joint ventures)
(c) associates
(d) unconsolidated structured entities.
Interest in Subsidiaries
An entity shall disclose information that enables users of its consolidated financial statements
(a) to understand: (i) the composition of the group; and
(ii) the interest that non-controlling interests have in the group’s activities
and cash flows; and
(b) to evaluate: (i) the nature and extent of significant restrictions on its ability to access or
use assets, and settle liabilities, of the group; (ii) the nature of, and changes in, the risks associated with its interests in
CHAPTER 7 – CONSOLIDATION
346
FRS 103 BUSINESS COMBINATIONS
The FRS replaces FRS 103 (as issued in 2004) and comes into effect for business
combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after 1 July 2009. Earlier application is
permitted, provided that FRS 27 (as amended in 2008) is applied at the same time.
Scope
This FRS applies to a transaction or other event that meets the definition of a business combination. This FRS does not apply to:
(a) the formation of a joint venture.
(b) the acquisition of an asset or a group of assets that does not constitute a
business. In such cases the acquirer shall identify and recognise the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in FRS 38 Intangible Assets) and liabilities assumed. The cost of the group shall be
allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. Such a transaction or event does not give rise to goodwill.
(c) a combination between entities or businesses under common control.
Single Entity Concept
When the Parent has control over the Subsidiary either through a majority holding
of its voting shares or controlling its board of directors, it is considered a single
entity along with its subsidiary. Thus inter-company transactions (often held in
‘current accounts’) must be cancelled, and only transactions with the outside
world must be reported in the Consolidated Accounts.
CHAPTER 7 – CONSOLIDATION
347
Acquisition Method A business combination must be accounted for by applying the Acquisition Method, unless it is a combination between entities or businesses under common
control or the acquiree is a subsidiary of an investment entity, as defined in FRS 110 Consolidated Financial Statements, which is required to be measured at fair value through profit or loss.
One of the parties to a business combination can always be identified as the acquirer, being the entity that obtains control of the other business (the acquiree). Formations of a joint venture or the acquisition of an asset or a group of assets that
does not constitute a business are not business combinations. The FRS establishes principles for recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree.
Any classifications or designations made in recognising these items must be made in accordance with the contractual terms, economic conditions, acquirer’s operating or accounting policies and other factors that exist at the acquisition date.
Each identifiable asset and liability is measured at its acquisition-date fair value. Any non-controlling interest in an acquiree is measured at fair value or as the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets.
As of the acquisition date, the acquirer shall recognise, separately from goodwill,
the identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree at their acquisition-date fair values.
CHAPTER 7 – CONSOLIDATION
348
Acquisition-related Costs
Acquisition-related costs are costs the acquirer incurs to effect a business
combination. Those costs include finder’s fees; advisory, legal, accounting,
valuation and other professional or consulting fees; general administrative costs,
including the costs of maintaining an internal acquisitions department; and costs of
registering and issuing debt and equity securities. The acquirer shall account for
acquisition-related costs as expenses in the periods in which the costs are incurred
and the services are received, with one exception. The costs to issue debt or equity
securities shall be recognised in accordance with FRS 32 and FRS 109.
Contingent Considerations
Some changes in the fair value of contingent consideration that the acquirer recognises after the acquisition date may be the result of additional information that the acquirer obtained after that date about facts and circumstances that existed at the acquisition date. However, changes resulting from events after the
acquisition date, such as meeting an earnings target, reaching a specified share price or reaching a milestone on a research and development project, are not measurement period adjustments. The acquirer shall account for changes in the
fair value of contingent consideration as follows: (a) Contingent consideration classified as equity shall not be remeasured and its
subsequent settlement shall be accounted for within equity.
(b) Contingent consideration classified as an asset or a liability that:
(i) is a financial instrument and is within the scope of FRS 109 shall be
measured at fair value, with any resulting gain or loss recognised either in profit or loss or in other comprehensive income in accordance with that FRS.
(ii) is not within the scope of FRS 109 shall be accounted for in
accordance with FRS 37 or other FRSs as appropriate.
CHAPTER 7 – CONSOLIDATION
349
Consolidation Adjustments
1. Cost of Investment
FRS 103 requires Acquisition Cost of a subsidiary to be expensed of to the profit
and loss and not to be added as Cost Of Investment (COI).
FRS 103 requires Contingent Considerations (i.e. future settlements) to be
recognised as part of the parent’s COI (or purchase considerations) and FRS 103 do
not require it to be probable.
COI less Fair Value of Net Assets (FVNA) acquired = Goodwill
2. Goodwill
FRS 103 measures goodwill at the acquisition (Acq) date in terms of Full Goodwill
and Proportionate Goodwill.
a. Full Goodwill: given FV of NCI
Full Goodwill at Acq
= (P’s COI at Acq + FV of NCI at Acq) - 100% S’s FVNA at Acq
NCI at YE
= FV of NCI at Acq + S’s Post Acq RE movement – NCI% of Goodwill impairment
b. Full Goodwill: given NCI’s Goodwill
Full Goodwill at Acq
= (P’s COI at Acq – P’s % of S’s FVNA at Acq) + NCI’s Goodwill at Acq
NCI at YE
= NCI’s Goodwill at Acq + S’s FVNA at YE – NCI% of Goodwil impairment
c. Partial (Proportionate) Goodwill with no goodwill allocated to NCI
Proportionate Goodwill at Acq
= P’s COI – P’s share of S’s FVNA = P’s Goodwill only
NCI at YE = NCI’s % of S’s FVNA at YE
In partial goodwill, there is no goodwill allocated to the NCI so there will not be any
share of goodwill impairment to the NCI.
FRS 103 prohibits the amortisation of goodwill. Instead, goodwill is tested for
impairment under FRS 36 and any reversal of impairment loss on goodwill is
prohibited.
Any gain from a bargain purchase (negative goodwill) is recognised as revenue
immediately in the statement of profit or loss.
CHAPTER 7 – CONSOLIDATION
350
3. Pre/Post Retained Earnings in Mid-Year Acquisitions and Disposals
During mid-year acquisitions, it is important to split the Subsidiary’s Retained
Earnings (RE) into Pre-Acq RE and Post-Acq RE in order to calculate Goodwill and
NCI at YE. This is because before the acquisition, the Parent is not entitled to any
Pre-Acq RE but is entitled it’s share (% acquired) in the Subsidiary’s Post-Acq RE.
The same is true for mid-year disposals where the Parent would be entitled a share
of the Subsidiary’s profits before disposal.
Thus, in the case of mid-year acquisitions and disposals, it is important to
determine the pre and post retained earnings by Time Apportionment
4. Inter-Company Balances
Inter-Company Balances within a Group (i.e. Parent and Subsidiary)
The application of the Single Entity Concept requires inter-company balances
arising from trade and loan resulting in amounts due to and due by the Parent and
Subsidiary must be eliminated. It makes no sense for a company to owe money to
itself.
Often, the amount due to and due by the Parent and Subsidiary will not agree, this
is due to in-transit items at the year end. Therefore, such items must be treated
as received and then inter-company balances be eliminated.
a. Treat as if received in-transit items:
Dr Bank or Dr Inventory or Expenses
Cr Receivables Cr Payables
b. Eliminate inter-company balances:
Dr Payables
Cr Receivables
Inter-Company Balances with an Associate
Remember that Associates are not part of the group of companies, thus, the
amounts due to and due by the Parent and Associate are left unadjusted on the
CSOFP and is not eliminated.
CHAPTER 7 – CONSOLIDATION
351
5. Unrealised Profit in Inventory
a. Unrealised Profit within a Group
Individual companies within the group, namely Parent and Subsidiary) may buy and
sell inventories to each other at a profit. However, if such inventories, inflated with
profits, are still kept in stock at the year end, unrealised profit (URP) must be
eliminated. There is no problem of URP if the inventories have been sold to external
parties outside the group.
i. Downstream Sales of inventories
This is when Parent sells inventories to Subsidiary. The Parent had made the
PURP and the Subsidiary have the inflated inventories in stock at year end.
To eliminate PURP: Dr Parent’s RE $PURP
Cr Inventories on CSOFP $PURP
ii. Upstream Sales of inventories
This is when Subsidiary sells inventories to Parent. Here, the Subsidiary made the
SURP while the Parent have the inflated inventories in stock at year end.
To eliminate SURP: Dr Subsidiary’s RE $SURP
Cr Inventories on CSOFP $SURP
The PAT attributable to the NCI will be adjusted with SURP.
b. Unrealised Profit with an Associate
Regardless of Downstream or Upstream sales with the Parent and the Associate,
Equity Method in FRS 28 requires one adjustment. Often, we adjust the URP in the
Associate’s RE. This is because the Equity Method is a single line disclosure on the
CSOFP and CSOPL, thus, no double entry is required for such adjustment.
To eliminate URP in both Downstream and Upstream Sales:
Dr Associate’s RE $URP Only single entry in Equity Method
Cr Inventories on CSOFP $URP
CHAPTER 7 – CONSOLIDATION
352
6. Unrealised Profit in Non-Current Assets
Like inventories, the group may buy and sell Non-Current Assets (NCA) among the
Parent and Subsidiary. As a result, unrealised profit exists in the seller and extra
depreciation has been charged in the buyer (user) due to the inflated cost price of
the non-current asset.
Upon consolidation, it is important to eliminate:
- unrealised profit in the seller, and
- extra depreciation in the buyer,
so that the group is presented as if there were no such sale in the first place.
a. Downstream sales of NCA
Parent sells NCA to Subsidiary.
- eliminate URP in Parent: Dr Parent’s RE $URP
Cr NCA in CSOFP $URP
- eliminate extra Dep in Subsidiary: Dr NCA in CSOFP $extra Dep
Cr Subsidiary’s RE $extra Dep
b. Upstream sales of NCA
Subsidiary sells NCA to Parent.
- eliminate URP in Subsidiary: Dr Subsidiary’s RE $URP
Cr NCA in CSOFP $URP
- eliminate extra Dep in Parent: Dr NCA in CSOFP $extra Dep
Cr Parent’s RE $extra Dep
7. Fair Value Adjustments
The cost of the investment is established at fair value (FV) and must therefore be compared to the Parent’s share of the Subsidiary’s net assets taken over, also at fair value. This ensures the difference between the two figures, goodwill, is realistic.
At the acquisition date, there are fair value adjustments on the Subsidiary’s non-current assets, thus, resulting in depreciation adjustments in the post-acquisition period.
Increase FV: Dr NCA Charge Additional Dep: Dr S’s RE Cr S’s RE (time apportion if needed) Cr NCA
CHAPTER 7 – CONSOLIDATION
353
8. Parent’s Accounting Policy
Upon consolidation, the Subsidiary must follow the Parent’s accounting policy.
9. Proposed Dividends
When Parent Company becomes a shareholder and controls the Subsidiary
Company, the Parent is also entitled to receive dividend income from Subsidiary.
Upon consolidation, any inter-company dividends from Subsidiary due to Parent
must be eliminated in the CSOFP.
In the CSOPL, inter-company dividends from Subsidiary is also eliminated because
such dividends are already included in Sales Revenue under the Acquisition Method.
CHAPTER 7 – CONSOLIDATION
354
Kayte (Dec 2014 Q3)
(a) Kayte operates in the shipping industry and owns vessels for transportation.
In June 2014, Kayte acquired Ceemone whose assets were entirely investments in small companies. The small companies each owned and operated one or two
shipping vessels. There were no employees in Ceemone or the small companies. At the acquisition date, there were only limited activities related to managing the small companies as most activities were outsourced. All the personnel in Ceemone were employed by a separate management company. The companies owning the
vessels had an agreement with the management company concerning assistance with chartering, purchase and sale of vessels and any technical management. The management company used a shipbroker to assist with some of these tasks.
Kayte accounted for the investment in Ceemone as an asset acquisition. The consideration paid and related transaction costs were recognised as the acquisition price of the vessels. Kayte argued that the vessels were only passive investments
and that Ceemone did not own a business consisting of processes, since all activities regarding commercial and technical management were outsourced to the management company. As a result, the acquisition was accounted for as if the vessels were acquired on a stand-alone basis. (8 marks)
Required:
Discuss the accounting treatment of the above transactions in the financial statements of Kayte.
Note: The mark allocation is shown against each of the elements above.
CHAPTER 7 – CONSOLIDATION
358
Marrgrett (Dec 2008 Q2) Marrgrett, a public limited company, is currently planning to acquire and sell interests in other entities and has asked for advice on the impact of FRS103
‘Business Combinations’ and FRS110 ‘Consolidated Financial Statements’. The company is particularly concerned about the impact on earnings, net assets and goodwill at the acquisition date and any ongoing earnings impact that the new
standards may have. The company is considering purchasing additional shares in an associate, Josey, a public limited company. The holding will increase from 30% stake to 70% stake by
offering the shareholders of Josey, cash and shares in Marrgrett. Marrgrett anticipates that it will pay $5 million in transaction costs to lawyers and bankers. Josey had previously been the subject of a management buyout. In order that the current management shareholders may remain in the business, Marrgrett is going
to offer them share options in Josey subject to them remaining in employment for two years after the acquisition. Additionally, Marrgrett will offer the same shareholders, shares in the holding company which are contingent upon a certain
level of profitability being achieved by Josey. Each shareholder will receive shares of the holding company up to a value of $50,000, if Josey achieves a pre-determined rate of return on capital employed for the next two years.
Josey has several marketing-related intangible assets that are used primarily in marketing or promotion of its products. These include trade names, internet domain names and non-competition agreements. These are not currently recognised in
Josey’s financial statements. Marrgrett does not wish to measure the non-controlling interest in subsidiaries on the basis of the proportionate interest in the identifiable net assets, but wishes to
use the ‘full goodwill’ method on the transaction. Marrgrett is unsure as to whether this method is mandatory, or what the effects are of recognising ‘full goodwill’. Additionally the company is unsure as to whether the nature of the consideration would affect the calculation of goodwill.
To finance the acquisition of Josey, Marrgrett intends to dispose of a partial interest in two subsidiaries. Marrgrett will retain control of the first subsidiary but will sell
the controlling interest in the second subsidiary which will become an associate. Because of its plans to change the overall structure of the business, Marrgrett wishes to recognise a re-organisation provision at the date of the business combination.
Required:
Discuss the principles and the nature of the accounting treatment of the above plans under Financial Reporting Standards setting out any impact that FRS103 ‘Business Combinations’ and FRS110 ‘Consolidated Financial Statements’ might have on the earnings and net assets of the group.
Note: this requirement includes 2 professional marks for the quality of the discussion.
(25 marks)
CHAPTER 7 – CONSOLIDATION
359
Consolidation in P2 involves the following: 1. Complex Groups 2. Piecemeal Acquisitions 3. Disposals 4. Foreign Subsidiaries All other exams on CSOFP are Fellow Subsidiaries unless stated otherwise below.
1. Comlpex Grp:
Vertical Group
D-Shaped Group
J’10
Ashanti
D’12
Minny
J’13
Trailer
M’16
Q1
2. Piecemeal Acq
D’07
Beth
J’09
Bravado
D’11
Traveler
J’12
Robby
D’12
Minny
J’13
Trailer
D’14
Joey
J’15
Kutchen
S’15
Q1
M’16
Q1
3. Disposal
D’09
Grange
J’10
Ashanti
J’14
Marchant
J’15
Kutchen
S’15
Q1
4. Foreign Subsi
J’08
Ribby
J’11
Rose
D’15
Bubble
CHAPTER 7 – CONSOLIDATION
360
1. Complex Groups
Complex groups exists when the Parent Company controls two or more Subsidiaries and / or Associates.
1. Fellow Subsidiaries P
70% __90%
S1 S2 There are 2 Cost of Investments (COI) in P (each S1 and S2).
During exam, we do not need to calculate Effective Control.
SOFP P S1 S2
NCA
COI in S1
COI in S2
$x
$x
CHAPTER 7 – CONSOLIDATION
361
2. Vertical Group
P
70%
S1’s NCI 30%
90%
S2
There are 2 COIs, each in the books of P and S1. During exam, we need to calculate Effective Control as follows:
First, apply FRS 110 to decide if control exist in order to cosolidate. FRS 110: P would control S1 and S1 would control S2. P would also control S2 via
S1. Thus, P need to consolidate both S1 and S2. Next, we calculate Parent’s Effective Control in Sub-Subsidiary, S2.
P’s indirect control in S2 = 70% x 90% = 63% NCI in S2 = 100% - 63% = 37%
Adjusting Entries: Dr NCI Cr COI
Effecive control DO NOT apply to inter-group dividends.
SOFP P S1 S2
NCA
COI in S1
COI in S2
$x
$x
CHAPTER 7 – CONSOLIDATION
362
3. D-Shaped Group P
___80%
30% S1’s NCI 20% __40%
S2
There are three COIs in total, two in the books of P and one in the book of S1.
During exam, we would need to calculate P’s Effective Control in S2. Under FRS 110, P contols both S1 and S2.
Under FRS 103, P’s effective control in S2 would be:
P’s control in S2 = Direct + Indirect = 30% + (80% x 40%) = 30% + 32% = 62%
NCI in S2 = 100% - 62% = 38% Adjusting Entries: Dr NCI
Cr COI
SOFP P S1 S2
NCA
COI in S1
COI in S2
$x
$x
$x
CHAPTER 7 – CONSOLIDATION
363
EXAMPLE 1
J purchased its shareholding in B on 1 January 2007, and B purchased its shareholding in D on 31 December 2007. Control was achieved on these acquisition dates.
EXAMPLE 2
Using the information in Example 1, assume that J purchased its shareholding in B on 31 December 2007, and B purchased its shareholding in D on 1 January 2007. All other facts within the scenario are unchanged.