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SBR Day-8

ACCA

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14 views7 pages

SBR Day-8

ACCA

Uploaded by

fulltimestudies111
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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SBR DAY – 8 (GROUP ACCOUNTING BASIC GROUPS)

WHY DO WE NEED TO CONSOLIDATE THE COMPANIES?


ANS. Because the parent has major control over the subsidiary i.e., takes most of the decisions
of the subsidiary. Therefore, the treatment should be done if they were one company.
Revision of consolidation technique
Step 1: Group Structure & PURP
1. Know who’s the parent & subsidiary
2. What is the % of ownership?
3. Year and Date of Acquisition.
4. What is The NCI ( Non – Controlling Interest)?

Step 2: Net Assets of the Subsidiary


We add ‘Net Assets’ ( Assets – Liabilities) = everything we gained from the subsidiary – every
obligation of the subsidiary.
Eg. Net Asset = Assets – Liabilities  ASSETS – LIABILITY = EQUITY
 ASSETS = LIABILITY + EQUITY
Assets – PPE, CASH, PAYABLES, INVENTORY, ETC = 100
LIABILITIES – LOAN, PAYABLES ETC. = 30
NET ASSETS = 70
Step 3: Goodwill
While doing a consolidated statement of financial position, we don’t add the share capital &
share premium of the parent & subsidiary.
Step 4: Non – Controlling Interest ( In book)
Step 5: Group Retained Earnings ( In book)

Goodwill 100
Cost of investment 20
FV of NCI @ Acquisition (150)
-30

The parent is paying ‘ less than’ what the subsidiary is worth – called as Bargain Purchase.
This will be Recorded as a gain in the P & L.
Goodwill Dr. 30
Gain Cr. 30
Example 9.1

Gabby Carlos Adjust Consolidation


W2 - Net Assets of Carlos
NCA
Tangible 2000 1000 3000
Investment in Carlos 1200 -1200 0
Goodwill 1000
Current Assets 1600 1200 2800 Share Capital
total assets 6800 Retained Earnings

Share Capital (Parent 1000 1000


Group Retained Earnings 2160 W3 - Good will

 Goodwill

Fair value Proportionate Method


(full goodwill) Goodwill relates to the Parent only
[Goodwill relates to
Parent + NCI]

Eg. ( FAIR VALUE)


Goodwill
Cost of investment 100
FV of NCI 20
Less: Net Assets (80)
40
Impairment (10)
30
Eg. Goodwill ( Proportionate method) (1)

COI 100
Less: Net Assets (64) 80% x 80
36
Eg . Goodwill ( Proportionate method) (2)
Cost Of Investment 100
Non Controlling Interest 16 80 x 20%
Less: Net Assets (80)
36
Impairment (10)
26

Provision of unrealized Gain ( PURP)


EXAMPLE 9.2
SHARE EXCHANGE
How many shares is Hasburg buying? Ans. $24M
How many shares is Hasburg giving? Ans. 24 x 2/3 = $16 M
What is the value of those Shares? Ans. 16 x 4 = $ 64M
Cost of Investment Dr. (wk.3) 64 M
To Share capital 16
To Share Premium 48
DEFERRED CASH
How much is the future payment? Ans. $24M
Present Value of the shares = Ans. 24/(1+10%) raised to 3 = $18 M

Cost of investment Dr. 18 M


To liability 18M
End of Year 1

18 x10% = 1.8 (18 + 1.8 = 19.8)


Y2 = 19.8 x 10% = 1.98 ( 19.8 + 1.98 = 21.78)
Y3 = 19.8 +19.8 = 21.78 x 10% = 2.178

EXAMPLE 9.3
Goodwill: $
Cost of Investment 20m *2 = 40M
Fair Value of Investment
Refer to the spreadsheet
The FV of 20M shares given by Kutchen in exchange of purchasing the 70% shares in House is $
40M (20M * 2 )
The contingent consideration should be considered at its fair value on the date of acquisition
after taking account of the probability of Kutchen having to make an additional payment.
The Fv of the contingent consideration is $ 2 M ( 20% * 5* 2). This will be recorded at
acquisition and the goodwill will not change if the actual value of shares is different in future.
The contingent consideration will be shown
EXAMPLE 4
THE ACCOUNTING STANDARDS DEFINE CONTROL AS:
POWER OF THE OPERATING & FINANCIAL ACTIVITIES OF IN THE INVESTEE & HAVING THE
ABILITY TO USE THIS POWER TO HAVE EXPOSURE TO VARIBLE RETURNS.
AS FORMAT HOLDS 49.1% OF PROTECT IT DOES’NT HAVE A MAJOR SHAREHOLDING. THE NEXT
DECISION IS IF FORMAT HAS CONTROL OVER PROTECT OR NOT.
IF THEY HAVE CONTROL, THE DIRECTORS OF FORMAT SHOULD CONSOLIDATE THE PROTECT
FINANCIAL STATEMENTS.
Example 5
As per the accounting standard, an entity that can be considered as a business canbe
consolidated.
A business is made up of inputs, processes & outputs.
Conew is a separate entity in which chemical has 65%. However Conew only has one Asset
i.e. Intellectual property of Tacton

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