Академический Документы
Профессиональный Документы
Культура Документы
SESSION 9
Group accounting
Equity accounting
Foreign currency translation
1
Objectives
The objectives of this session are to:
Introduction
So far we studied how to prepare financial statements of a single legal
entity
As the members of the group act together as though they were a single
economic entity it makes sense to prepare a single set of financial
statements for the entire group: consolidated financial statements.
Investors and other users can analyse a single set of financial reports to
assess the group business performance
The group
A group of companies is characterised by having:
Claim held by the parent company over the shareholders equity of its subsidiaries
or associates
S1
40%
S2
43%
% of control = 43% : P has no control over S1
% of interest = 55% (43% + 30% x 40%)
60%
S1
40%
S2
43%
Control
Control over other entity exists when:
Parent company owns directly or indirectly more than half (> 50%) of voting rights
Parent company owns half or less (= < 50%) of voting rights and it obtains:
a)
b)
Power to govern the financial and operating activities of the company (large
influence over management) under a statute or agreement; or
c)
d)
Power over more than half the voting shares by virtue of an agreement with
other investors.
Significant influence
Ownership >= 20% of the voting power of the investee
Evidence of significant influence:
Representation on the board of directors or equivalent governing body of
the investee;
Participation in policy-making processes;
Material transactions between the investor and the investee;
Interchange of managerial personnel; or
Provision of essential technical information
Type of
relation
Control
Significant
Type of
company
Subsidiary
Reporting
method
Full consolidation
Global consolidation
Associate
Equity method
Joint
Joint
Proportional
Control
Venture
consolidation
Influence
10
Quick exercise
70%
C1
10%
C2
20%
Control?
Interest?
11
Quick exercise
70%
C1
10%
C2
20%
Control: 30%
Interest: 27%
12
13
14
Consolidation process
The full consolidation process usually involves the following steps:
1.
2.
3.
15
Add group balance sheet and income statement items, plus consolidation
adjustments
Notes
16
17
18
19
Note that the elimination entries do not appear in either A or B accounts. The adjustments
are prepared in a working sheet in order to create the consolidated financial statements
20
21
22
23
Goodwill
Assume that on 31 December 2013 company A purchases 100% of the ordinary
shares of B but for 320. After this transaction, company As balance sheet is :
24
Goodwill
The consolidated balance sheet at 31 December 2014 is prepared as follows:
Goodwill
Accounting treatment of goodwill
26
28
Minority interests
When the parent company A divides ownership with other shareholders, company
B net assets should be divided between the majority shareholders and minority
shareholders:
Goodwill for the majority shareholders:
Purchase price
320
160
(80% x 200)
Goodwill
160
40
29
Minority interests
Capital and reserves in the consolidated balance sheet will be:
Share capital
50
Retained profit
450
Shareholders funds
500
Minority interests
Total
40
540
30
31
32
320
200
70
216
104
(20% x 270)
54
33
34
35
Inter-company balances
In the consolidated balance sheet, eliminate assets and liabilities
Inter-company loans
Eliminate asset (investment) in lender company and liability (loan payable) in
borrower company
36
Inter-company balances
In the consolidated income statement, eliminate revenues and expenses
37
Inter-company balances
Consider the balance sheets and income statements of company A (parent) and
company B (subsidiary):
38
Inter-company balances
Consider the balance sheets and income statements of company A (parent) and
company B (subsidiary):
39
Inter-company balances
Other information:
1. Company A acquired 100% of B when the claims on Bs net assets were:
Share Capital
Retained Profit
5,000
4,000
Required:
Prepare the consolidated income statement and the consolidated balance sheet for
the group
40
Inter-company balances
Eliminations:
Goodwill
In the consolidated balance sheet
Investment
(12,000)
Goodwill
3,000
Share capital
(5,000)
Retained profit
(4,000)
Dividends
In the consolidated income statement (1)
Dividend income
(1,000)
Dividend expense
1,000
(1) If the parent company applies the equity method in its individual accounts, the investment account needs to
be adjusted as well
41
Inter-company balances
Eliminations:
Sales, cost of sales and unrealisable profit in inventory
In the consolidated balance sheet
Inventory (profit in closing inventory)
Profit
(100)
(100)
(200)
(200)
100
(100)
42
43
44
Theories of consolidation
The way consolidation accounting deals with goodwill, minority interests
and inter-company balances varies with the concept of group used
45
Entity concept
Group is viewed as an economic unit rather than an aggregation of companies
dominated by the majority shareholders
Focus on the group resources controlled by the entity (group) and regards the
entity of the group owners as a secondary issue
Goodwill is recognised in the consolidated balance sheet by its full amount and
allocated to majority and minority interests
46
47
Theories of consolidation
Currently, IFRS standards (IAS 27 and IFRS 3) are more inclined to the
parent company concept but includes elements of both approaches
hybrid model
48
Significant
Influence
Type of
company
Subsidiary
Associate
Reporting
method
Full consolidation
Global consolidation
Equity method
49
50
51
Equity method
Example
Company A buys 30% of company Bs shares for 400m on 1 Jan 2015,
of which 80m is goodwill.
During 2015 company B declares and pays 20m in cash dividends to all
of its shareholders.
52
Equity method
Accounting entries:
Investment in B
Dividend received
(30% of 20m)
Share in asset revaluation
(30% of 10m)
Share in profit of B
(30% of 100m)
Impairment of goodwill
Cash
Investment
Goodwill
(400)
320
80
(6)
3
Reserve
Profit
(I/S)
30
30
(20)
(20)
53
Quick exercise
Assume following events
1. Investor acquires 48,000 shares amounting to 40% of CY
corporation for 10 euro per share
54
Quick exercise
Assume following events
1. Investor acquires 48,000 shares amounting to 40% of CY
corporation for 10 euro per share
55
56
57
(750)
Inventory
Acc
payable
700
700
Profit
(I/S)
(50)
50
(650)
(100)
58
reserve)
59
1 GBP = 3 SGD
31 December X1
1 GBP = 4 SGD
Average rate in X1
60
Non-current assets
Current assets
1,600
2,400
4,000
1,100
1,500
31 Dec X1 1 Jan X1
Share capital
Retained profit
1,500
1,300
2,800
1,500
600
2,100
Liabilities
1,200
500
4,000
2,600
2,600
4,900
4,200
700
61
(in m)
31 Dec X1
Non-current assets
Current assets
1,600/4 =
2,400/4 =
400
600
31 Dec X1
Share capital
Retained profits
1,500/3 =
600/3 =
700/3.5 =
Foreign currency
translation reserve
Liabilities
(200)
700
1,200/4 =
500
200
200
300
1,000
(in m)
Sales
Expenses
Profit for the year
4,900/3.5 =
4,200/3.5 =
1,400
1,200
700/3.5 =
200
62
Closing
rate
Exchange
Foreign exchange
rate used in
currency difference
balance
sheet
3.0
1,500/4 1,500/3 = -125
Share capital
1,500
4.0
Retained profit
600
4.0
3.0
700
4.0
3.5
2,800
4.0
-200
63
Financial investments are measured at fair value or amortised cost except for equity
investments for which there is no quoted market price
64
Summary
In this session we:
65