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Consolidated Financial Statements Revision Notes

The document provides information about consolidated financial statements including: 1. The main purpose is to explain why consolidated statements are prepared and how to prepare them. 2. Key terms like group, parent, subsidiary and control are defined. Control exists if over 50% of voting rights are held or other circumstances give power over financial policies. 3. Non-controlling interests represent the portion of a subsidiary's equity not owned by the parent and must be presented separately in consolidated statements.

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304 views27 pages

Consolidated Financial Statements Revision Notes

The document provides information about consolidated financial statements including: 1. The main purpose is to explain why consolidated statements are prepared and how to prepare them. 2. Key terms like group, parent, subsidiary and control are defined. Control exists if over 50% of voting rights are held or other circumstances give power over financial policies. 3. Non-controlling interests represent the portion of a subsidiary's equity not owned by the parent and must be presented separately in consolidated statements.

Uploaded by

koketso
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Slide 22.

Consolidated Financial Statements


Slide 22.2

Main purpose

The main purpose of this chapter is to explain the


reasons for preparing consolidated financial
statements and to show how to prepare such
statements.
Slide 22.3

Learning Objectives

By the end of this chapter, you should be able to:

1. Explain the meaning of consolidated financial statements;


2. define the terms ‘group’ , ‘parent’ ‘control’ and ‘subsidiary’
in accordance with IFRS 10 ;
3. prepare consolidated accounts at the date of acquisition
4. calculate goodwill;
5. explain the treatment of goodwill;
6. account for non-controlling interests;
Slide 22.4

Consolidated Financial Statements

Definitions under IFRS 10


• Group: A parent and its subsidiaries
• Parent: An entity that controls one or more
entities
• Subsidiary: An entity that is controlled by
another entity
• Control: power (de jure or de facto) to govern
the financial and operating policies of an entity
so as to obtain benefits from its activities
Slide 22.5

Assessing power over an investee


Slide 22.6

Control considerations

 Control assumed if > 50% of voting rights


 Control may exist where < 50%.
Slide 22.7

Control may exist where < 50%


voting rights

1. Agreement with other investors gives power


over > 50%
2. Power over financial and operating policies
by an agreement
3. Power to appoint or remove majority of board
members
4. Power to cast the majority of votes at a board
meeting.
Slide 22.8
Slide 22.9

IFRS 10: Reasons for preparing


consolidated accounts
 Because many corporations have controlling
interests in other business entities, financial
statements for the parent company alone can be
misleading. For this reason, parent companies
are legally required to prepare consolidated
financial statements that include data about the
financial performance of subsidiaries
 Prevent manipulation
 Inflating sales by selling within the group
 Better measurement of management performance using
ROCE.
Slide 22.10

Consolidated Statement of Financial


position at the date of acquisition
If parent owns 100%:
1.Add up individual statements of both companies
2.Cancel out items that appear as both an asset in parent (e.g.
investment in sub-company, receivables from sub-company) and
liability or equity in subsidiary (e.g. share capital, reserves or
inter-company loans)
3.Objective = To show true assets, equity and liabilities of the
group as a whole.

Example 1: Class Exercise (A. Melville Pp288)

Note: these cancellations only take place in CSFP only, not in


individual company accounts
Slide 22.11

Goodwill arising on consolidation


 In many cases the amount paid by parent to acquire a
subsidiary is more than BV of net asets (A-L). In that
case, we need to calculate and recognize goodwill on
acquisition
 Fair value of consideration
 Fair value of identifiable net assets in subsidiary
 Difference is goodwill
 Goodwill is normally a price paid above net assets to
compensate for acquisition of control over a subsidiary
Slide 22.12

Treatment of goodwill
 Positive goodwill
 Impairment test in accordance with IAS 36
 Must be done yearly
 Once applied, it cannot be reversed in a subsequent accounting
period
 Negative goodwill
 Reassess and
 Recognise immediately in Income Statement under IFRS 3
Business Combinations.
Why does negative goodwill occur?
Errors in measuring fair values of acquired company
Recognition of future costs to be incurred
Purchased at a bargain price

Example 2: Class Exercise (A. Melville P290)


Note: These cancellations only take place in CSFP only, not in individual
company accounts
Slide 22.13

Statement of Financial Position –


Subsequent years
 Retained earnings:
Post-acquisition retained earnings of a subsidiary-belong to the
group, to be included in group accounts
Other reserves: Post-acquisition reserves to be included in
group accounts
 Impairment loss relating to goodwill
Dr: Group retained earnings
Cr Goodwill
 Refer to Example 3 on Page 292 (A Melville)
Slide 22.14

Partly owned subsidiaries

 Non-controlling Interest(or minority


interests) appear if the group does not
own 100% of the shares in a subsidiary
 They represent the part of the net assets
and profit or loss of the subsidiary
attributable to the equity interests that are
not owned
Slide 22.15

Non-controlling interests

 Share of acquired company not held (owned)


by parent
 Non-controlling – also called “minority interest”

 All assets and liabilities controlled are included


in the consolidated accounts
 Non-controlling interest = amount not owned by parent.
 Non controlling interest must be presented
separately in the equity section of the parent’s
CSFP.
 Refer to example 4 on page 294
Slide 22.16

Measurement of Non-controlling
interest

Method 1
 Share of net assets of subsidiary at reporting date
Method 2
 Share of net assets of subsidiary PLUS goodwill
apportioned to the non-controlling interest. (At
acquisition)
 In the exam, you are expected to use method 1
 Refer to example 5 on page 296
Slide 22.17

Practice Question: The Bird group

1 January 20X0
Bird acquired 80% of 10,000 £1 shares in
Flower for £1.50 per share.
Therefore, Bird will own 80% of 10,000 shares =
8,000 shares, which represent 80% of Flower’s
equity.
The cost of these shares is:
8,000 x £1.50 = £12,000
Slide 22.18

Bird group – statement of financial


position on acquisition

£ £ £

Non-controlling interest
Slide 22.19

Bird group – statement of financial


position on acquisition (Continued)
£ £
Slide 22.20

Bird group – statement of financial


position on acquisition (Continued)
Slide 22.21

Non-controlling interest using method


2
 If using Method 2 to measure the non-controlling
interest, we need to know the fair value of the non-
controlling interest in the subsidiary at the date of
acquisition. Let us assume in this case that this fair
value is £2,900
 Goodwill that is attributed to the non-controlling £
interest is as follows:
Fair value of non-controlling interest at date of acquisition 2,900

20% (the share attributable to the non-controlling interest) of the


(2,800)
net assets at the date of acquisition (£14,000)
Attributable goodwill 100
Slide 22.22

The consolidated statement of


financial position using method 2
£

Non-current assets other than goodwill 31,000

Goodwill (£800 + £100) 900

Net current assets 14,000

45,900

Share capital 16,000

Retained earnings 27,000

Non-controlling interest (£2,800 + £100) 2,900

45,900
Slide 22.23

Treatment fair value and


book value differ (IFRS 3)
 Assume Flower’s non-current assets were
 Book value £11,000
 Fair value £11,600

 Recognise parent’s %
 80% of (11,600 − 11,000) = 480
 Increase non-current assets
 Reduce goodwill.
Slide 22.24

Fair value and book value differ


(Continued)

£ £ £

Non-controlling interest
Slide 22.25

Fair value and book value differ (Continued)

£ £
Slide 22.26

Disclosures according to IFRS 10

 Requires an entity to disclose information


that enables users of financial statements
to evaluate:
the nature of, and risks associated with, its
interests in other entities; and
the effects of those interests on its financial
position, financial performance and cash flows.
Slide 22.27

Questions???
Thank you!

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