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Chapter 3-ABC PDF

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85 views137 pages

Chapter 3-ABC PDF

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Angela Ricaplaza Reveral
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Chapter 3 - Separate and Consolidated Financial Statements - Subsequent fo Date of Acquisition Introduction This chapter examines procedures for consolidating the financial statements of porent and subsidiary companies. Some differences in the consoldation process result from diferent methods of parent- ‘company accounting for subsidiary investments. Investments in voting stock of other companies may be consolidated, or they may be separately reported in the financial statements at cost, af far vatve, or, ‘carrying value of equity. The method of reporting adopted depends on o number of factors including the size ofthe investment, the extent fo which the investor exercises control over the activites ofthe investee, ‘ond the marketabilty ofthe secures. Investor refers o a business enfily that holds an investment in voting stock of another company. Investee refers fo a corporation that isued voting stock held by an investor's Consolidation workpopers for a parent companylinvestor that uses the cost model and accounting are ilustrated in the chapter to set the slandard for good consolidation procedures. The chapter examines ‘adcitional complenites that aise from detailed recording of far values of a subsicioy’s net assets: The appendix to this chapter aso ilustrates the equity method with and without recognition of goodwill impaiment loss. By contras, this chapter presents a workpaper that develops the information needed for consolidated balance sheets and income and retained earnings statements Consolidated Statements Subsequent to Date of Acquisition The preparation of consolidated financial statements afler acquisition is not materially different in concept from preparing them at the acquisition date in the sense that reciprocal accounts are eliminated and remaining balances are combined. The process is more complex, however, because time has elapsed and business activity has taken place between the date of acquisition and the date of consolidated statement preparation. On the date of acquisition, the only relevant financial statement is the consolidated balance sheet; after acquisition, a complete set of consolidated financial statements - statement of comprehensive income, and retained eamings statement. Separate Financial Statements PAS 27 paragraph 4 defines separate financial statements as “those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees”. “Advanced Financial Accounting = A Comprehensive: Conceptual & Procedural Approach CHAPTER 3 q : In other words, the fasset on the investor's balance sheet is the direct interest in the investment itself, The following level of reporting is described in i Qe Produces its own single economic financial sta! ble 3.1, wherein a parent company ments or consolidated financig statements: z| each Levels of Rey Table 3.1: summarizes the Accounting Treatment required at an for Consolidated Financi Statements (CFS) Purposes Required naire Sones srelatatotemons | Group account Investment | Citteria Financial Stalements’. | Financ! 8) Subsidiary | Control PAST Invesimentiscaried | PFRS 10 Full Consolation {51% or more). | ot Invesimeniis 1. Cotto elirinated and net Z mecca assets of subsicioy with PRS «re consolidated with (Foanciat srumen) a Ving he Exatymathod | those of the parent ‘Associote | Sionlican’ | FAS27/28 rvesimentis | PAS 26/PFRS 10 Equily eccouning influence | cariedct Investment is (20% 50%) 1. Cos or ‘accounted for ving Z'inaceordance th ‘rocearcon the equity method {finoncilinshumert 3. sng the Eaiy method Joint | Contractual | PAS 27/28; PRS TT PAS 257PRRSTOIPFRST] | Equiy accountng Venture | arrangement | invesimentiscoriedt: | Investments axjdntcontal | 1 como ‘accounted for using (20% 50%) a the equity method {nancial instrument) 3. ing the Eauly method y invesiment | Asset held for | PRS 9 PRSa 2s for single company whichis | oceretion of pastas none of _ | weaith the above + A onkactualanangement mu! ex which esERRes ant GonvaL “Fale Valve Opton ‘Accounting for Subsidiaries, Associates and Joint Ventures in 's Separate Financial Statements In the Parent's Separc A parent will usually produce its own single company financial statem these should be prepared in accordance wih PAS 27, Seporate Financioy Sllomens these statements, investments in subsidiaries, associates and Joint ventures included in the consolidated financial statements should be either: 1. At cost, or Il In accordance with PERS 9 (air Value Option), or Ml. Using equity method as described in PAS 29, Where subsidiaries ore classtied as held for sale, the, in accordance with PFRS 5. 'Y should be accounted i The equiy method willbe discussed in deta onthe later part of ths chapter, ‘Advanced France Accounting ~A Conoroense Concept & Praca — eed SEPARATE and CONSOLIDATED FINANCIAL STATEMENTS ‘ ~ SUBSEQUENT to DATE OF ACQUISITION 23 The approach in accordance with PERS 9 refers to the fair value option/model will be discussed on the later part of this chapter Atthough there appears to be significant differences between cost model, equity method ond fair value option/method, the main diflerence is timing. Table 3.2 shows a comparison of the three methods “ Table 3.2: Pro-forma Eniies/Comparison - Accounting for Subsidiaries, Associates and Joint Ventures in the Books of the Acquirer/Investor: E Coif of investment | Investment. ox | Investment. Various credits... x | Variouscredis... m1 | Various credits... Results of Operations: «@. Net Income of _ | Noeniy TESTER cron 0 | NOY Subsidiony Subsidiary Investment income _»x« Cash dividend of | Cosh/Dividend CashyDividend ‘Cosh/Dividend Subsidiary Feceivable..n.. x | receivable... wx | FeCEIVObIE. neem 4 Dividend Income/ Subsidiay/ Dividend income/ Subsiciory! Investment Income x | Subsidiary! Investment income xx Investment Income _»x ‘c. Amortization of ~ | No enty Subsidion? No eniry (no special ‘Allocaled Excess Investment Income..x« | treatment is accorded Investment... 1 | forthe allocated excess) ‘dimpakment of | Noeniry Subsidiory/ Noeniry Goodwill Investment Income...x« Investment ~ The First Method: Cost Model (formerly Cost Method or Initial Value Method) PAS 27 does not define “cost” except in the specific set of circumstances of certain types of group reorganization and in fistfime transition to PFRS. PAS 8 Accounting Policies, Changes in Estimates and Errors ~ requires that in the absence of a specific guidance on PFRS, management should first refer to the requirements and guidance in IFRS (PFRS) dealing with similar and related issues. In PFRS 3, the term “cost” no longer refers to cost of an acquisition, so the relevant measure will be: 1. The consideration transferred discussed in Chapter 1. 2. Another point of reference might be PAS 32 - Financial Instruments: Presentation and PERS 9. Investments in subsidiaries, associdtes and joint ventures, while outside the scope ‘of PAS 32 and PFRS 9, are clearly financial ‘assets (and therefore financial instruments) as defined in those standards. The cost mode! (method) of accounting for inter-corporate investments is consistent with historical cost basis for most other assets. * CHAPTER 3 24 = Under the Cost Model: 1. IS subject to the usual eriticis Guesons arse as to the relevance investment acquired some years eater. 2. The cost model (method) does conform mere Bessa ifartd el accounting ond legal views of he reaiztion of income ln it ubsidlories earnings are not available to the parent until ransferred i ic t companies, simple to . Is the most common method used in practice by parent e Use during the accounting period and avoids the risk of incorrect adjustments, Typically, the comect income of the subsidiary is not known until me ite end of the accounting period. Awaiting its determination would delay the parent company’s closing procedures, it should be noted than for purposes of preparing consolidated statements, companies that use the COST MODEL should be converted fo EQUITY METHOD. When the cost model is used, the investment in subsidiary, account is retained at its original cost of acquisition balance. No adjustments are made fo the account for income as it is eamed by the subsidiary. Income on the investment is limited to dividends received from the subsidiary. The Cost model is acceptable for subsidiaries that aré to be consolidated because, in the consolidation process, the investment account is eliminated entirely, Results of Operations: Cost Model - Dividends Declared/Paid Under this model: The only result of operation that should be Tecognized Is only the cash dividend declared / paid. PFRS 3 Paragraph 38A states that: “An ently shall recognize a dividend ftom @ Sibsiclery Joint vente, of assoclate In prof or loss in ts seperate fhancll statements when sight fo receive the dividends Is established" 14 against historical cost. In particu, tis oe reporting the purchase price of gn The effect of these changes is that all dividends paid or payal ubsidiary to’ 4 parent are to be recognized as revenve by the parent 1 PY © 8 Asnotedin PERS 3 amendments, “the requrement o separate eomings ot.an entty ito pre-aequistion and pos!-cequistion comer me for assessing whether a dividend Is a recovery of is as temoved from PFRSs." sociated Investment has been Entities ore now obiged fo apply a two-stage process, : ‘re taken to income and the parent must now detemine wnenng ed, ail didn has been impaired as‘a resuit. ‘ot the investmer This lst of incicatos of impitment in PAS 36 as amended in

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