Week 7

Question 1

Reasons regulators require parents to prepare consolidated statements

Answer 1

1. To supply relevant info to investors in the parent entity
2. Allow comparison of group to other entities
3. Assist discharge of accountability by management of the group
4. Report risks and benefits of group as single economic entity

Question 2

Reasons regulators require parents to prepare consolidated statements

2. Allow comparison of group to other entities

Answer 2

• Some entities are organised into a group structure such that different activities are undertaken by separate entities within the group.
• Other entities are organised differently, with some having all activities conducted within the one entity.
• Access to consolidated financial statements makes comparisons across the group an easier task for the users of financial statements.

Question 3

Reasons regulators require parents to prepare consolidated statements

To supply relevant information to investors in the parent entity.

Answer 3

• A shareholder’s wealth in the parent is dependent not only on how that entity performs, but also on the performance of the other entities controlled by the parent.

Question 4

three elements that must be held by an investor in order for it to have control:

Answer 4

1. power over the investee
2. exposure, or rights, to variable returns from its involvement with the investee
3. the ability to use its power over the investee to affect the amount of the investor’s returns.

Question 5

Power over the investee

four characteristics of power

Answer 5

1. power is related to relevant activities
2. power arises from existing rights

3, power is the ability to direct

4. the ability to direct must be current to have power.

Question 6

Power over the investee

four characteristics of power

power related to relevant activities

Answer 6

activities of the investee that significantly affect the investee’s returns

Question 7

Power over the investee

four characteristics of power

power arising from existing rights - voting rights

when investor has more htan 50% of voting shares?

Answer 7

where an investor holds more than half of the voting rights of the investee

Question 8

Power over the investee

four characteristics of power

power arising from existing rights - voting rights

when investor has less than 50% of voting shares?

Answer 8

examine the potential actions of other shareholders in the investee.

Question 9

business combination occurs when

Answer 9

acquirer obtains control of another business or businesses

Question 10

Direct acquisition

Answer 10

acquirer purchases assets of the acquiree and possibly assumes liabilities then recognising these assets and liabilities in its own accounts.

Question 11

Direct acquisition

what does acquiree do?

Answer 11

acquiree will will then either continue to operate with a reduced level of assets and liabilities (if partial net assets are acquired) or may liquidate (if all its net assets are acquired).

Question 12

Direct acquisition

How to identify the acquiree

Answer 12

net assets acquired, not the entity from whom the net assets were acquired.

Question 13

Indirect acquisition

Answer 13

acquirer purchases sufficient shares in another entity to obtain control of that entity and hence control that entity’s net assets

Question 14

Indirect acquisition

what does the acquiree do

Answer 14

acquiree and does not liquidate, but continues its operations with no change in its assets and liabilities.

Question 15

indirect acquistion

how is acquiree identified

Answer 15

the transaction is between the acquirer and the shareholders of the other entity and the acquiree is identified as the entity (represented by net assets) over whom control is obtained.

Question 16

two key conditions to be satisfied in order for a business combination to occur.

Answer 16

The assets or net assets acquired must be a business.

the acquirer must obtain control of that business.

Question 17

two key conditions to be satisfied in order for a business combination to occur.

The assets or net assets acquired must be a business.

Answer 17

has to be capable of providing a return e.g. supermarket division cf buying shares

an entity still in the development stage, such as a mining operation that is currently exploring but not yet producing ore, can still be classed as a business.

Question 19

two key conditions to be satisfied in order for a business combination to occur.

acquirer must obtain control of that business

Answer 19

an entity has the power to deal with the assets acquired and has the ability to get varying, rather than fixed, returns from using those assets.

e.g. by transfer of ownership (direct acquisition) or from controlling interest (indirect acquisition)

Question 20

Combination goodwill

Answer 20

arises from the combination of the acquirer’s and acquiree’s businesses. It stems from the synergies that result from the combination.

E.g. an acquirer may have access to supplies of high-quality sand suitable for glass making, while the acquiree may be involved in the manufacture of glass products. Together, able to reduce costs — than if the entities were separate.

Question 21

Going-concern goodwill

Answer 21

aquiree may be able to earn a higher return on net assets than would be expected from those net assets operating separately.

Question 22

3 elements of control

power

Answer 22

existing rights that give the current ability to direct the relevant activities (i.e. activities that significantly affect the returns)

Question 23

Power is defined according to AASB 10 as:
“existing rights that give the current ability to direct the relevant activities (i.e. activities that significantly affect the returns)”.

what are relevant activities

Answer 23

– selling and purchasing of goods and services

– managing financial assets
– selecting, acquiring and disposing of assets

– researching and developing new products

– determining a funding structure or obtaining fundin

Question 24

Power arises from

Answer 24

existing rights. Most rights arise from a legal contract.

Question 25

power arises from existing rights give example

Answer 25

– Voting rights. – Rights to appoint, reassign or remove members of the investee’s key management personnel. – Rights to appoint or remove another entity that participates in management decisions. – Rights to direct the investee to enter into, or veto any changes to, transactions that affect the returns.

Question 26

Power is assumed to exist when

Answer 26

the investor owns, directly or indirectly, more than half of the voting rights of an entity unless there is evidence to the contrary.

Question 27

factors to consider when determining if power exists when investor holds less than 50% of voting rights

Answer 27

- Attendance at AGMs: if only 60% of eligible votes attend meeting, 31% can control meeting and the decision making process  Dispersion of other shareholders: - probability of shareholders attending the general meeting and exercising their voting rights may be lessened by their geographical location - Holders of small share parcels are often not organised into voting blocks.  Level of disorganisation or apathy of the remaining shareholders.  Existence of contracts: *power by agreement with other investors.*  Existence of potential voting rights.

Question 28

Third indicator of power

Answer 28

ability to direct investor's rights should be substantie rights – must have the practical ability to exercise those rights.

Question 29

Power is the ability to direct. In other words, the rights that give power must be substantive – the holder must have the practical ability to exercise the rights. Paragraph B23 of AASB 10 provides some factors to consider in determining the existence of substantive rights:

Answer 29

Whether there are any barriers that prevent a holder from exercising the rights. e.g. financial penalties, terms that make it unlikely that rights will be exercised, and the absence of specialised services necessary for exercising the rights Whether the party or parties that hold the rights would benefit from the exercise of those rights; for example, potential voting rights. Where more than one party is involved, whether there is a mechanism in place to enable those parties to practically exercise the rights.

Question 30

If rights are purely protective,

Answer 30

the holder does not have power. Protective rights are rights designed to protect the interest of the party holding those rights without giving the party power over the entity to which the rights relate

Question 31

Examples of protective rights

Answer 31

A lender’s right to restrict a borrower from undertaking certain activities The right of a party holding a non-controlling interest to approve various transactions The rights of a lender to seize the assets of a borrower in the event of default.

Question 32

The returns to an investor must have the potential to vary as a result of the performance of the investee. examples

Answer 32

56 of AASB 10 provides examples of such variable returns: – dividends from ordinary shares that will change based on the profit performance of the investee – fixed interest payments from a bond, as they expose the investor to the credit risk of the issuer of the bond, namely the investee – fixed performance fees for management of the investee's assets, as they expose the investor to the performance risk of the investee.

Question 33

Acquisition related costs

Answer 33

directly attributable to a combination do not form part of the consideration transferred, rather they are expensed as incurred.

Question 34

four characteristics of power can be identified as

Answer 34

1. power is related to relevant activities 2. power arises from existing rights 3. power is the ability to direct 4. the ability to direct must be current to have power.

Question 36

power means abillity to direct substantive rights

Answer 36

exercisable when decision about relevant activities need to be made

Question 37

The returns received by investor that has control over an investee must

Answer 37

have the potential to vary based on performance of investee

Question 38

Besides having power to direct the relevant activities of the investee and rights to variable returns from the involvement with the investee, a parent must

Answer 38

have the ability to use its power over the investee to affect the variable returns received from the investee. This requires that the parent be able to use its power to increase its benefits and limit its losses from the subsidiary’s relevant activities.