slide 22.1 accounting for groups at the date of acquisition chapter 22
TRANSCRIPT
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Slide 22.1
Accounting forGroups at the Date of Acquisition
Chapter 22
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Slide 22.2
The main purpose of this chapter is to explain the reasons for preparing consolidated financial statements at the date of acquisition and to show how to prepare such statements.
Main purpose
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Slide 22.3
By the end of this chapter, you should be able to:• explain the need for consolidated financial statements;• define the meaning of IFRS 10 terms ‘control’ and
‘subsidiary’;• prepare consolidated accounts at the date of acquisition
and calculate goodwill for a wholly-owned subsidiary;• explain the treatment of goodwill;• account for non-controlling interests under the two
options available in IFRS 3;• understand the need for fair value adjustments and
prepare consolidated financial statements reflecting such adjustments.
Objectives
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Slide 22.4
Accounting for groups atdate of acquisition
• Definition of a group under IFRS 10• Definition of control:
– rights to variable returns
– ability to affect those returns
– through power over the investee• Reasons for preparing consolidated accounts.
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Slide 22.5
Definition of a group
• One enterprise controls another enterprise
– Directly
– Indirectly.
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Slide 22.6
Control considerations
Control assumed if > 50% of voting rightsControl may exist where < 50%.
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Slide 22.7
Control may exist where < 50%voting rightsAgreement with other investors gives power
over > 50%Power over financial and operating policies
by an agreementPower to appoint or remove majority of board
membersPower to cast the majority of votes at a board
meeting.
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Slide 22.8
Reasons for preparingconsolidated accountsBecause many corporations have controlling
interests in other business entities, financial statements for the parent company alone can be misleading. For this reason, parent companies are legally required to prepare consolidated financial statements that include data about the financial performance of subsidiaries
Prevent manipulation Inflating sales by selling within the group More meaningful EPS figure Better measurement of management performance using
ROCE.
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Slide 22.9
Alternative methods of preparing consolidated accountsThe purchase method
Fair value of parent company’s investment Fair value of identifiable net assets in subsidiary Difference is goodwill
Pooling of interests method No longer permitted under IFRS 3.
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Slide 22.10
Purchase method illustrated – the Rose group
1 January 20X0
Rose plc acquired 100% of 10,000 £1 common shares in Tulip plc for £1.50 per share.
In calculating the cost of the resources acquired, remember the accounting equation,
A = L + E,
Or A – L = E, where A - L = net assets
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Slide 22.11
The Rose group statement of financial position on acquisition
Rose has bought the Equity in Tulip, which is represented by Tulip’s net assets.
Tulip’s equity is £14,000, and the amount paid was 10,000 x £1.50 = £15,000
£ £ £
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Slide 22.12
The Rose group statement of financial position on acquisition (Continued)
££
£
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Slide 22.13
The Rose group statement of financial position on acquisition (Continued)
Why do you think the share capital and retained earnings of Tulip are not added to the balance sheet of the group (combined companies)?
Answer: The value of the equity has already been included in the
value of the assets and liabilities acquired.
£
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Slide 22.14
Treatment of goodwillPositive goodwill
Impairment test in accordance with IAS 36 Must be done yearly Once applied, it cannot be reversed in a subsequent
accounting period
Negative goodwill Recognise immediately in Income Statement under IFRS
3.
Why does negative goodwill occur?Errors in measuring fair values of acquired companyRecognition of future costs to be incurredPurchased at a bargain price
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Slide 22.15
Non-controlling interests
Share of acquired company not held (owned) by parent Non-controlling – also called “minority interest”
All assets and liabilities controlled are included in the consolidated accounts Non-controlling interest = amount not owned by parent.
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Slide 22.16
Non-controlling interest in consolidated statement of financial position
Method 1Share of net assets of subsidiary at reporting date
Method 2Share of net assets of subsidiary PLUS goodwill
apportioned to the non-controlling interest.
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Slide 22.17
The Bird group
1 January 20X0
Bird acquired 80% of 10,000 £1 common shares in Flower for £1.50 per share.
Therefore, Bird will own 80% of 10,000 shares = 8,000 shares, which represent 80% of Flower’s equity.
The cost of these shares is:
8,000 x £1.50 = £12,000
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Slide 22.18
Bird group – statement of financial position on acquisition
£ £ £
Non-controlling interest
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Slide 22.19
Bird group – statement of financial position on acquisition (Continued)
££
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Slide 22.20
Bird group – statement of financial position on acquisition (Continued)
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Slide 22.21
Non-controlling interest using method 2If using Method 2 to measure the non-controlling
interest, we need to know the fair value of the non-controlling interest in the subsidiary at the date of acquisition. Let us assume in this case that this fair value is £2,900
Goodwill that is attributed to the non-controlling interest is as follows:
£
Fair value of non-controlling interest at date of acquisition
20% (the share attributable to the non-controlling interest) of the net assets at the date of acquisition (£14,000)
Attributable goodwill 100
(2,800)
2,900
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Slide 22.22
The consolidated statement of financial position using method 2
£
Non-current assets other than goodwill 31,000
Goodwill (£800 + £100) 900
Net current assets 14,000
45,900
Share capital 16,000
Retained earnings 27,000
Non-controlling interest (£2,800 + £100) 2,900
45,900
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Slide 22.23
Treatment fair value andbook value differ (IFRS 3)Assume Flower’s non-current assets were
Book value £11,000 Fair value £11,600
Recognise parent’s % 80% of (11,600 − 11,000) = 480 Increase non-current assets Reduce goodwill.
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Slide 22.24
Fair value and book value differ (Continued)
£ £ £
Non-controlling interest
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Slide 22.25
££
Fair value and book value differ (Continued)
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Slide 22.26
How to calculate fair values – IFRS 3
Tangible assets Fair Value based on market value Depreciated replacement cost if no market value
available
Intangible assets Fair Value based on market value Best arm’s-length estimate if no market value.
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Slide 22.27
How to calculate fair values – IFRS 3 (Continued)InventoriesFinished goods
Selling price less cost of sale and reasonable profit
Work-in-progress Selling price less cost to complete, cost of sale and
reasonable profit
Raw materials Current replacement cost.
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Slide 22.28
Monetary assets and liabilities Amount to be received or disbursed Discounted if significant
Marketable securities Current market values
Non-marketable securities Estimated value based on performance.
How to calculate fair values – IFRS 3 (Continued)
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Slide 22.29
IFRS 13
Fair Value Measurementprice in an orderly transactionbetween market participants.
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Slide 22.30
1. Explain how negative goodwill may arise and its accounting treatment.
2. Explain how the fair value is calculated for:• Tangible non-current assets• Inventories• Monetary assets.
3. Explain why only the net assets of the subsidiary and not those of the parent are adjusted to fair value at the date of acquisition for the purpose of consolidated accounts.
Review questions
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Slide 22.31
4. Coil SA/NV is a company incorporated under the laws of Belgium. Its accounts are IAS compliant. It states in its 2003 accounts (in accordance with IAS 27, para. 13):
Principles of consolidation
The consolidated Financial statements include all subsidiaries which are controlled by the Parent Company, unless such control is assumed to be temporary or due to long-term restrictions significantly impairing a subsidiary’s ability to transfer funds to the Parent Company.
Required: Discuss whether these are acceptable reasons for excluding a subsidiary from the consolidated financial statements under the revised IAS 27.
Review questions (Continued)
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Slide 22.32
Review questions (Continued)
6. Parent plc acquired Son plc at the beginning of the year. At the end of the year there were intangible asset reported in the Consolidated accounts for the value of a domain name and customer lists. These assets did not appear in either the Parent or Son’s Statements of Financial Position.
Required: Discuss why assets only appear in the consolidated accounts.