GROUPS

Question 1

subsidiary

Answer 1

entity controlled by parent = power to direct the activities; we consolidate 100% and then show NCI part sepa-ly

Question 2

when there is control

Answer 2

1. can exercise the majority of voting rights in investee
2. is in contractual arrangement with others giving control
3. have less than 50%, but remainder is widely distrib-d
4. holds potential voting rights - in future can convert debentures to shares

Question 3

Associate

Answer 3

entity has significant influence = power to participate in fin and operational policy decisions - cast your vote; when
- representation on the board (have right to attend meetings; have directors in board)
- participation in policy making
-material transaction bn 2 entities
- interchange of managerial personnel
-provision of essential technical information

Question 4

Associate

Answer 4

Bc it is associate it should be Equity account; SFP (shar ein queity) SPLOCI (share in associate)

Question 5

Consolidated SFP

Answer 5

1. is it mid year acquisition?
2. what is NCI if it is subsidiary! NO NCI FOR ASSOCIATE - we don’t have contrl over associate!
3. net assets of subsidiary

Equity shares (don’t change from reporting to acquisition date)
Share premium
Ret.earnings.
PUP (W) - if S is seller (mutual inventory?)
FV adj (don’t forget to make adj in group) - SCORE MARKS WHEN PUT ENTRIES IN GROUP ACC
W3. GOODWILL
FV of consideration

Question 6

CFS

Answer 6

users need information on liquidity, viability and financial adaptability of entity - prime determinant of worth of business. CFS necesssary bc final profit figures are relatively easy to manipulate
IN pL ther eare many items that require judgement - inv valuation; depr; allowance for rec-le

Question 7

consolidation

Answer 7

prepared by replacing the cost of investment with the individual assets and liabilities underlying that investment
intra-group transaction to be removed - no income, expenses, assets or liabilites that are arisen from transaction bn enities wuthin the group.
Prepare as if all trans-s of the group had been carried out by single entity
control - wonership of more than 50% voting power

Question 7

Control

Answer 7

• power over investee
• exposure or rights to variable returns from its involvement with investee
  -ability to affect the amount of investor’s returns

Question 7

Exemptions from group FS

Answer 7

• the parent itself if wholly owned subsi or partially owned sub and its owners do not object the parent not preparing conso
• the parent’s debt or equity instruments are not traded in public market
• the parent did not file its FS for issuing any instruments in public market
• ultmate parent makes conso and is available

Question 8

Is having majority of shares is control

Answer 8

no defined
2. The fact that unanimous consent is required would suggest
that there is no control over the investee.

Question 9

overtrading

Answer 9

• high profit and low cash generation
• large increases in inventory, receivables, and payables
• discuss working capital managemnet
  Dividend and interest payments can be compared to cash generated from
  trading operations to see whether normal operations can sustain such
  payments. If cash generated from operations cannot cover dividends and
  interest payments, the business may have problems continuing as a going
  concern

Question 10

if goodwill is negative and positive

Answer 10

if positive treat it as NCA on SFP
If GW is negative, acquisition is regarded as bargain purchase and a gain is incl within RE in W5

Question 11

NCI working

Answer 11

NCI value at acquisition + NCI share of post acq reserves- share of impairment (FC method only) = NCI in SFP

this shows the value of subsidiary that is not owned by parent

Question 12

W5 group RE

Answer 12

P’s RE (100%) + P’s % of S’s post-acquisition RE - P’s share of impairment + gain on bargain purchase = Group RE on SFP
This shows the retained earnings that are attributable to the parent’s
shareholders.

Question 13

methods for calc of GW

Answer 13

1. proportion of net assets (calc vlaue of GW attr to parent only)
2. FV method (calculates GW attr to both parent and NCI)

Question 14

GW

Answer 14

an asset representing future economic benefits arising from other assets acquired in business combo that are not indiv-ly identified and sep-ly recognised

Question 15

treatment of GW

Answer 15

• amortisation is not allowed
• anually tested for impairment
• capitalsied as intangible NCA

Question 16

to show control

Answer 16

include all of net assets in Conso

Question 17

where to show NCI net assets of S

Answer 17

within the equity section of COnso

Question 18

purchased goodwill definition

Answer 18

is the difference between the value of an acquired entity and aggregate of the FV of entity’s identifiable assets and liabilities (existed at the date of acquisition)

Question 19

deferred and contingent considerations

Answer 19

• should be measured at FV at the date of acquisition, taking time value of money into account
• same for deferred considerations
  1/(1+r)^n - (For example, $1 receivable in three years’ time
  based on a cost of capital of 10% = $0.75).
  Each year the discount is then unwound by ‘charging’ interest on the
  outstanding liability. This increases the deferred liability each year (to
  increase to future cash liability) and the discount is treated as a finance
  cost.

Question 20

what if parent issues shares instead of consideration

Answer 20

the share price at acquisition should be used to record FV of the shares

Question 21

unwinding of discount

Answer 21

PV of future payments% interest = PV (240.75=18) at 10%; so unwinding every year is 1.8 m
Dr Finance cost
Cr non-current liabilities - deferred consideration
For the next three years the discount will be unwound, taking the
interest to finance cost until the full $24 million payment is made
in Year 3.

Question 22

S’s contingent liability

Answer 22

As contingent liabilities will only be a disclosure
note in the subsidiary’s individual financial statements, the adjustment to
be made in the consolidated financial statements will be to reduce the net
assets in W2 and to include a liability

Question 23

reserves; NCI; deferred consider

Answer 23

RE NCI after equity deferred consid in liabilites

Question 24

where FV addition of brand and PPE would go

Answer 24

in NET ASSETS! FV of plant - 200 Depr adj (200*2/5) report (80) FV Brand 250 Amortis adj (50) at reporting; nothing on acq date

Question 25

If impariment of goodwill

Answer 25

don't forget NCI share of impairment of goodwill! in calculation of NCI at reporting date

Question 26

group RE if impairment

Answer 26

Group RE P's RE Unwind of discount Share of S's RE Impairment of GW (share of parent)

Question 27

post acquisition revaluation

Answer 27

if there is post acq reval in S's NCA, the full amount of gain should be added to NCA P's share of gain -> reval surplus; NCI's share of gain -> NCI Dr PPE 200 Cr Reva surplus (OCI) 180 Cr NCI interest 20

Question 28

Intra group trading potential problem areas

Answer 28

1. current accounts bn P and S 2. loans held by one company in the other 3. dividends and loan interest 4. unrealised profits on sales of inventory 5. unrealised profits on sales of NCA

Question 29

if there are cash/goods in transit

Answer 29

At the year end, the current accounts may not agree, owing to the existence of in-transit items such as goods or cash. If there are goods or cash in transit, adjust the statement of financial position as if the goods or cash had been received: – cash in transit adjusting entry is:  Dr Cash  Cr Receivables – goods in transit adjusting entry is:  Dr Inventory  Cr Payables Once in agreement, the current accounts may be cancelled as normal.

Question 30

when PUP arises?

Answer 30

Where goods are still held by a group entity, any unrealised profit must be cancelled Where goods have been sold by one group entity to another at a profit, and some of these goods are still in the purchaser’s inventory at the year-end, then the profit on these goods is unrealised from the viewpoint of the group as a whole

Question 31

Inventory in group

Answer 31

Inventory must be included at cost to the group (i.e. original cost to the entity which then sold it).

Question 32

If parent is seller

Answer 32

If the seller is the parent, the profit element is included in the parent’s retained earnings and belongs to the group. Adjustment required: Dr Group retained earnings (deduct the profit in W5) Cr Group inventory (deduct from inventory on the face of the SFP)

Question 33

if seller is S

Answer 33

If the seller is the subsidiary, the profit element is included in the subsidiary’s retained earnings and relates partly to the group, partly to any non-controlling interest (NCI). Adjustment required: Dr Subsidiary retained earnings (deduct the profit in W2 – in reporting date column) Cr Group inventory (deduct from inventory on the face of the SFP) By adjusting W2, the PUP will automatically be shared between the parent and the NC

Question 34

intra group NCA

Answer 34

If one group entity sells non-current assets to another, adjustments must be made to recreate the situation that would have existed if the sale had not occurred:  there would have been no profit on the sale  depreciation would have been based on the original cost of the asset to the group. (page 488)

Question 35

forex on gw

Answer 35

1. should be calculated at functional currency of S 2. be treated like other asset of S and translated at the reporting date using closing rate

Question 36

areas for extra attention on conso

Answer 36

to transactions which maybe of not market value or maybe lost if th e company is rmeoved from group - i-g cash and receivables - can be done to manipulate an entity's cash position prior to - Inventory/Non-current assets – Assets could have been sold at inflated prices within the group. The unrealised profits will be removed from the consolidated financial statements, but the item will remain at the inflated cost in the individual statements of financial position. - Shared costs/assets – The company may share assets with others in the group, which would be lost if the company were removed from the group. Any additional assets (such as office space) that would be required if the company became a standalone entity should be taken into consideration.