topic4a-consolidated balance sheet

8/6/2019 TOPIC4A-Consolidated Balance Sheet

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INTRODUCTION

Business Combination

Acquisition

Purchase net assets

Acquire assets and liabilities Amalgamation/absorption

(Chap5)

Acquire control

Acquire share capital

Parent and Subsidiary



1. PARENT AND SUBSIDIARY

Holding/ Parent/ Investor

S1

55%

S1

55%

S1

55%

S1

55%

S1

55%



Sec 5 of the CA1965 defines a subsidiary company as one:

In which the investor company

Controls the composition of the BOD of the investee company; @

Controls >50% of the voting power; @

Holds >50% of the issued share capital (excluding PSC); @

It is a subsidiary of a subsidiary of the investor company

Definition of Subsidiary



FRS 127 Consolidated and Separate FS defines control as ³the

power to govern the financial and operating policies of an enterpriseso as to obtain benefits from its activities´

Control

Control is presumed to exist when:

The investor owns, directly @ indirectly , >50% of the voting power

The investor has options @ warrants ± may give an increase in its votingpower @ reduce the voting power of the other investors in the common

investee.

Situations where control is present even though the voting power is <50%

Power of >50% of the voting rights by an agreement with other investors

Power to govern the financial n operating policies under statute@agreement

Power to appoint@remove the majority of the members of the BOD

Power to cast the majority of votes at meetings of the BOD



Other indications to identify an acquirer / investor

The one whose fair value is the larger than the other combiningentity

The entity giving the purchase consideration; likely to be theacquirer

The one whose management team is able to dominate the other entity

When a new entity is formed to effect a business combination, theacquirer cannot be the new entity but must be the one of the existedentities before the business combination

The one who issues the shares where the purchase price is settledin share exchange



2. NEED TO PREPARE CONSOLIDATED FS

The holding company has to prepare a set of FS for the group, i.e.; theconsolidated FS

Consolidated balance sheet

Consolidated income statement

Statement of changes in equity

Consolidated cash flow statement

The CA1965 and the FRS require the holding company to prepare theconsolidated FS along with its FS; i.e.; two sets of FS

As a separate legal entity-show its acquisition of shares as a LT investments Consolidated FS-all items in BS and IS are combined to form one set of FS

as though the holding and the subsidiary, together, are one entity



Exempted from Preparing Consolidated FS

The Ninth Schedule of the CA 1965 exempts a wholly owned parent

company from preparing consolidated FS

FRS 127 exempts a parent from preparing consolidated FS when:

The parent itself is a wholly owned subsidiary, or is a partially owned

subsidiary and the other owners do not object it not presenting

consolidated FS

Its debt or equity instruments are not traded in a public market (not a

PLC)

The ultimate or any other intermediate parent produces consolidatedFS



Diagram A Diagram B

H Bhd H Bhd

SS

SS

SS

100%

90%90%

90%



3. EXCLUSION FROM CONSOLIDATION

The Ninth Schedule of the CA1965 allows parent companies to exclude

certain subsidiaries from being consolidated

Temporary controlling interest in the subsidiary

The subsidiary is situated in the foreign country The accounts would be misleading @ harmful to any member of the group

The business is very different from the parent company

FRS 127 allows non-consolidation of a subsidiary only when the parent

losses control over a subsidiary



4. GROUP STRUCTURE

Vertical Group

H Bhd

S

80%

SS60%



Mixed Group

S SS

H

B

25%75%

P

C

30%

D

60%

30%

55%

40%



5. CONSOLIDATION METHOD

Purchase / acquisition method

The purchaser recognizes the cost of the businesscombination, the assets acquired and the

liabilities.Cost is usually shares bought-shares referred toas investment.

The parent company records it as non-currentasset.

The value at which investment is recorded is theamount paid or the fair value of assets and otherconsideration.



STEPS IN THE PURCHASE

Identifying the acquirer

Measuring the cost of business combination

Allocating the cost of business to the fair value of net assets to determine the goodwill.



Identifying the acquirer

This is the entity that obtains the control of theother combining entities.

The acquirer =purchaser



Measuring the cost of businesscombination The cost of the business combination

=cash given+ fair value of consideration +incidental costs incurred.

Cost of the business combination includes:

The fair value of the considerations given : assets, Liabilitiesincurred/ assumed, Equity instruments issued. All aremeasured at fair value.

� Deferred liabilities- discounted to present value .

� Published equities ±the published price at the date of

acquisition.

Costs directly attributable to the acquisition.� Do not include the cost of arranging or issuing liabilities or

equities.



Allocating the cost of business to the fair value of net assets to determine the

goodwill.

If the agreement includes an adjustment tothe purchase consideration contingent on

future events then cost should include theadjustment if it is probable and can bemeasured reliably.

non-current assets are taken at fair valueless cost to sell.

Restructuring cost is not a liability-unlessthere is an obligation to restructure at thedate of acquisition.



T he recognition criteria for assets andliabilities

Assets other than intangible: Fair value can bemeasured reliably and future economic benefit is

probable Intangible assets: Fair value can be measured reliably.

good will from in-process research and that fromdevelopment costs -separately recognize if the project

meets the definition of intangible assets.



T he recognition criteria for assets andliabilities(cont·d.)

Liabilities other than contingent liability: Fair value canbe measured reliably and are probable obligations.

Contingent liabilities:

recognized only if the fair value can be recognizedreliably. Investigation by a governmental agency orpayment of unusual fines or penalties.

� Contractual payments are probable and thusrecognized as contingent liabilities and taken into the

cost of the business combination� Large payments for unspecified services.



GOODWILL

excess of the cost of combination over the fair valueof the identifiable assets and liabilities of thebusiness combination at the date of acquisition.

Goodwill=purchase price ² fair value of the assets

and liabilities.

Can be a positive /negative goodwill.

Positive :

� recognized as an asset and measured at cost.

� Impaired annually or more frequently.



GOODWILL (Cont·d)

Negative

� Reassess the identification and measurement of

the assets, liabilities and contingent liabilities ofthe acquirer.

� Reassess the cost of business combination.

� Recognize the excess remaining immediately as

gain in the profit and loss account.



6. ADJUSTMENTS TO COST OF BUSINESS OR

F AIR VALUE OF THE NET ASSETS

Cost determined provisionally:-initial accounting isbased on these values

Any adjustment must be done within one year

Goodwill has to be adjusted with adjustments todepreciation and amortization if fair values differ fromprovisional values.

If adjustments be made after one year-FRS 108, Accounting for changes in accounting estimates and

error.



ADJUSTMENTS TO COST OF BUSINESS OR

F AIR VALUE OF THE NET ASSETS (Cont¶d)

Deferred tax

� If deferred tax asset or carried forward tax losses does

not meet the recognition criteria then treated as income.

� The carrying amount of goodwill will be reduced to the

amount that is recognized when tax is recognized as an

asset.



7. WHEN BUSINESS COMBINATION IS

ACHIEVED IN STAGES

Treat each transaction separately.

Goodwill determined for each acquisition.

Requirements:

� Approval of shareholders.� Approval of Securities Commission.

� FRS3 Business Combinations

The effective date of acquisition is the date on whichcontrol of the net assets and operation is effectivelytransferred to the acquirer .

If the acquisition is through a public offer then date is onreceipt of a sufficient number of acceptances.

For private companies it is the date when unconditionaloffer is accepted



8. MEMBERSHIP OF HOLDING COMPANY

Subsidiaries cannot hold shares in parent

company

If hold before become subsidiaries, then have to

dispose within 12 month, or longer

Subsidiary cannot vote at the meeting of the

parent company



9. GROUP FINANCIAL STATEMENTS

Holding company must draw up consolidated

financial statement

To exclude all inter-company transactions and

balances



10. ACCOUNTING DATE FOR GROUP COMPANIES

Financial year of the subsidiaries must coincide with theholding company within 2 years after becoming thesubsidiaries

Director of the parent company may apply to CCM to

authorize the subsidiaries to continue with their financialyear .

But the difference must not more than 3 months

Adjustments must be made for all significant transactionsor events that occur between those date

Parent company and all its subsidiaries must apply theaccounting policies according to FRS 127



12. INFORMATION REGARDING SUBSIDIARIES

NAMES

PLACE OF INCORPORATION

PRINCIPLE ACTIVITIES

THE PERCENTAGE OF THE

ISSUED CAPITAL HELD BY

THE HOLDING COMPANY



13. DISCLOSURE

The following information need to be disclosed in the

consolidated FS:

1. LISTING OF EACH SUBSIDIARY, NAME OF SUBSIDIARY, COUNTRY OF CORPORATION,

PRINCIPLE ACTIVITIES AND PROPORTION OF

OWNERSHIP INTEREST



IF

DIFF

ERENT OF

PROPORTION OF

VOTING POWER EXIST,FOLLOWING WILL ALSO BE INCLUDED:

REASONS NOT CONSOLIDATING A SUBSIDIARY;

NATURE OF THE RELATIONSHIP BETWEEN THE PARENT

AND A SUBSIDIARY- PARENT HOLDS < 50% OF THE VOTINGPOWER;

NAME OF AN ENTERPRISE WHERE > THAN 50% OF THEVOTING POWER IS HELD BUT THERE IS ABSENCE OF CONTROL; AND

EFFECT OF THE ACQUISITION OR DISPOSAL OF SUBSIDIARIES ON THE FINANCIAL RESULTS AND POSITION

AT THE REPORTING DATE.



2. IN THE PARENT¶S SEPARATE FS, THE

DESCRIPTION OF THE METHOD USED

TO ACCOUNT FOR SUBSIDIARIES.

topic4a-consolidated balance sheet

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