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Consolidation AT and SINCE acquisition - Coggle Diagram
Consolidation
AT
and
SINCE
acquisition
About this Unit
Learn how to prepare consolidated financial Statements by mastering an important calculation called:
Analysis of Equity
Unit focuses on an interest acquired on acquisition date
Must be able to
account for an Interest
where the subsidiary is
acquired at a price
that is:
Higher than the net asset value
Premium
-
Recognition of goodwill
Lower than the net asset value
Discount
-
Gain on a bargain-purchase recorded in profit or loss
Equal to the net asset value
Basic procedures for preparations of consolidated Financial Statements
1) Elimination of common items
2) Consolidation of the remaining items of parent and subsidiary
adding together like items items
of assets, liabilities, equity, income and expense
Line by Line by
Example
Parent acquires shares in a subsidiary
Parents Books
Dr
Investment in Equity
Cr
Bank
Subsidiary Books
Dr
Bank
Cr
Equity
(Shares)
Since
Investment in Equity
and
Equity (Shares)
are common they would need to be eliminated
To be eliminated,
Common items
need to be
reversed
through consolidation journals
For subsidiary
Debit Equity Shares
For parent
Credit Investment in Equity
Now in order to present the combined assets, liabilities, equity, income and expenses of the parent with those of the subsidiary
Non-common
(Basically items that are the same)
items are combined on a line-by-line basis in the consolidated statements by adding together like assets, liabilities, equities, income and expenses
Property, Plant and Equipment in the
Parent's books
Property, Plant and Equipment in the
Subsidiary's books
Consolidation Steps
Step 1
Determine if
control
has been
obtained
Step 2
If
control has been obtained
, calculate what
percentage of interest the parent has in the subsidiary
and calculate what the
non-controlling interest portion is
Step 3
Prepare an
Analysis of Equity
to determine whether there is
goodwill or gain from a bargain purchase
The
Analysis of Equity is not a requirement
of IFRS but is
generally used as a calculation
to assist determining the
amounts that would be considered for IFRS 3
Step 4
Prepare Pro Forma journals
to eliminate transactions between the parent and subsidiary
This
are not recognised in the individual general ledgers of either entities
For this reason they have to be repeated every year when preparing consolidated financial statements*
Step 5
Prepare the Annual Financial Statements
with the components being:
Consolidated Statement of Comprehensive income
Consolidated Statement of Changes in equity
Consolidated Statement of Financial Position
Consolidated Statement of Cash flows
Notes to the financial statements
1) Consolidation of a Wholly Owned Subsidiary at a Premium
Step 2
The parent company has to own
100%
of shares in the subsidiary
Step 3
The analysis of equity
consists of only the subsidiary's equity
and shows the Parent's portion of which in this case will be 100%
Since there isn't NCI
Goodwill =
Consideration
(Amount paid)
-
Parent's portion
(Share capital + Retained Earnings)
NCI
stands for
Non-controlling Interest
This is where the premium is because:
Consideration
higher than the
fair value of the identifiable assets and liabilities
of the acquiree
We paid more than the subsidiary is worth
Step 1
The parent company has to have control
Step 4
Eliminate Common items
Reverse the equity of subsidiary at acquisition
Eliminate parent's investment in the subsidiary
On acquisition goodwill arises that needs to be recognized
Goodwill is an asset and will need to be debited
Pro forma consolidation journal entry
Dr
Share Capital
(S)(SCE)
Dr
Retained Earnings
(S)(SCE)
Dr
Goodwill
(S)(SFP)
Cr
Investment in ...Ltd
(P)(SFP)
Elimation of common items and recognition of goodwill at acquisition
You use the above steps
Step 5
Combine all non-common items
Add 100% of the parent plus 100% of the subsidiary for each line item of asset and liability
The equity portion only consist of the parent's equity as the subsidiary equity was eliminated
2) Consolidation of a Wholly Owned Subsidiary at a Discount
Follow the above steps
Difference between
Premium
and
Discount
Discount
We actually pay less than what the subsidiary is worth and thus make
a gain on bargain purchase
which will be
credited
Cr
Gain from bargain purchase
(S)(P/L)
3) Consolidation of a Partly Owned Subsidiary at Acquisition
About
Parent owns less than 100% of the shares and will therefore need to
recognise the Non-Controlling Interest
Two options to treat
NCI
1)
Measure NCI at the proportionate share of the subsidiary's identifiable net assets
(equity)
2)
Or
Measure NCI at fair value
Watch the video it explains it properly
Steps for completing the at acquisition journals
Step 2
Eliminate subsidiary equity.
This will be measured at the amount at which the subsidiary measures their share capital*
Step 3
Recognise NCI
(either at Fair Value or proportionate share of the subsidiary's identifiable net assets
(equity)
Step 1
Eliminate the investment in the subsidiary.
This will be at the amount that was actually paid to acquire the shares of the subsidiary
Step 4
Recognise
goodwill or gain on bargain purchase
Dr.
Share Capital
Dr.
Retained Earnings
Dr.
Goodwill
Cr.
Gain on bargain purchase
Cr.
Investment in Subsidiary
1 more item...
Basic Procedures for consolidation after acquisition date
Eliminate common items
Consolidate the remaining non-common items on a line-by-line basis
Same as those of consolidation at acquisition date
Distributable profits of an acquired subsidiary in the hands of the group
Any profits earned before acquisition date
Are not distributable in the hands of the group
Purchased profits
form part of equity of the subsidiary that is eliminated on acquisition
The profit of the subsidiary that arises in the period since acquisition
Is considered distributable profit from the point of view of the group
However dividends distributed by subsidiary out of post-acquisition profit to the parent,
This profit is not available for distribution by the parent itself
Since Acquisition
section of
Analysis of owner's equity
To beginning of current year
This section outlines the
movements in the subsidiary's equity
from the
date of acquisition to the beginning of current year
Current year
The current year will depict the items that will affect the retained earnings such as:
Dividends
Transfers to reserves
Profit for the year
Investment in subsidiary carried at fair value in the separate records of the parent
After Initial recognition, an investment in a subsidiary shall be carried in the
separate records of parent
either at its:
Fair Value
Cost Price
If an investment in a subsidiary is
classified as a financial asset at fair value
through Other Comprehensive Income (OCI)
Changes in fair value
are recognised in other comprehensive income
Accumulated in equity through the
mark-to-market reserve
On Consolidation
Any
fair value adjustments
that were
recognised in the parent's separate records since acquisition
must
be reversed
to obtain the
acquisition-date fair value
A distinction needs to be made between
The reversal of the current period's movement against other comprehensive income
AND
movements that occurred in previous reporting periods
Which are reversed against the opening balance of the mark-to-market reserve in the statement of changes in equity
Therefore if measured at fair value, it will have an impact on the pro forma journals processed for consolidation after acquisition
Intragroup Dividend
It is necessary to
eliminate the dividend paid by the subsidiary
completely. The
portion which is paid to the parent is cancelled out
because it is an intragroup transaction
while the
non-controlling interests are debited
because the
pro rata portion paid to them represents a reduction
of their total interest in the subsidiary
Intragroup transactions will be eliminated in terms of
IFRS 10
Consolidation after acquisition date