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1、Consolidation Method2Definitions AASB 127 Para.4Consolidated Financial Statements are the financial statements of a group presented as those of a single economic entityGroup a parent and all its subsidiariesParent entity an entity that has one or more subsidiariesSubsidiary an entity including an un
2、incorporated entity such as a partnership,that is controlled by another entity3Nature of consolidated financial statementsConsolidated statements are the combined financial statements for a group.AASB 3 Business Combinations Appendix A business combination“The bringing together of separate entities
3、or businesses into one reporting entity”4Appendix A business defined as:An integrated set of activities and assets conducted and managed for the purpose of providing:(a)A return to investors;or(b)lower costs or other economic benefits directly and proportionately to policyholders or participants.5nT
4、he acquisition of an entity contrasts with the acquisition of a group of assets.nAccounting for a group of assets is based on AASB 116 Property,Plant and Equipment.6Consolidated financial statements provide information on the financial performance and position of multiple entities which are treated
5、as a single reporting entity.These statements show only the results of transacting with parties external to the economic entity.7Nature of consolidated financial statementsnThe consolidated financial statements are produced using the information contained in the financial statements of the entities
6、within the economic entity,however the accounts of the individual entities are not affectednThe consolidated financial statements consist of:-Consolidated statement of comprehensive income,-Consolidated statement of changes in equity -Consolidated statement of financial position.8Nature of consolida
7、ted financial statements Who has to prepare consolidated financial statements?AASB 3 para 17:“An acquirer shall be identified for all business combinations.The acquirer is the combining entity that obtains control of the other combining entities or businesses.”9AASB 3 Appendix A Reporting entity-An
8、entity in respect of which it is reasonable to expect the existence of users who rely on the entitys general purpose financial report for information that will be useful to them for making and evaluating decisions about the allocation of resources.A reporting entity can be a single entity or a group
9、 comprising a parent and all of its subsidiaries.10Consolidated financial statementsnConsolidated financial statements are prepared not just for the shareholders of the parent entity,but also for a range of users-creditors,employees,lenders,financial advisers,analysts.nReasons for ConsolidationnTo r
10、epresent as faithfully as possible the financial position,financial performance and cash flows of a parent and its subsidiaries nRelevant to usersnUnderstandable to usersnCompare group to other entities by user 11Concepts of ConsolidationnEntity concept of consolidation nassets and liabilities of pa
11、rent and subsidiary Non controlling interest(NCI)equity nParent entity concept of consolidationnassets and liabilities of parent and subsidiary NCI is a liabilitynProprietary concept of consolidationnPro-rata consolidation,based on parents share of subsidiary assets and liabilities12Control as the c
12、riterion for consolidationnControl-AASB 3 Appendix An“The power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities”.nSubsidiary is an entity that is controlled by another entity.nHence determination of whether one entity controls anot
13、her is crucial to the determination of which entities should prepare a consolidated financial report.13ControlTwo parts to the definition:(the power criterion)the ability to direct the financial and operating policies of another entity.(the benefit criterion)the ability to obtain benefits from the o
14、ther entity.Passive versus active control may not be actively involved in the management of.Non-shared control can only be one controlling entity.14ControlLevel of share ownership AASB 127 para 13 control is presumed to exist when the parent owns,directly or indirectly through subsidiaries,more than
15、 half of the voting power of an entityi.e more than 50%of the shares of another entity.Where ownership interest is less than 50%there is less consensus about whether control exists.15Existence of effective controlFactors that might indicate the existence of control(AASB 127,par.13)(cont.)Control als
16、o exists when the parent owns half or less of the voting power of an entity when there is(a)power over more than half of the voting rights by virtue of an agreement with other investors;(b)power to govern the financial and operating policies of the entity under a statute or an agreement;(c)power to
17、appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body;or(d)power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that boa
18、rd or body.n.16Consolidation adjustments AASB 127 para 18-31Combine the accounts of the entitiesBut subject to 3 types of adjustments:(i)The substitution elimination entry(ii)Elimination of inter-entity transactions e.g.sales,and their effects(iii)Accounting for any Non controlling interest17Consoli
19、dation adjustments Consolidation adjustments are NOT made in the records of the parent or the subsidiary,but on a consolidation worksheet or in a special consolidation journal.May need to repeat certain adjustments every year.18Consolidation worksheet format 191.The elimination entrynIn effect we:n(
20、i)substitute the assets and liabilities of the subsidiary for the asset“Shares in S Ltd”that is shown on the parent companys balance sheetn(ii)eliminate the parent companys interest in the acquisition date equity of the subsidiary20P Ltd 80%S LtdAssume on 1 July 2004,P Ltd paid$250 for ALL the share
21、s of S Ltd.At this date the recorded equity of S Ltd consisted of:Share capital$150Retained earnings100All the net assets of S Ltd are recorded at fair valueThe elimination entry21The elimination entryImmediately before acquisition:P LtdS LtdShare capital$200$150Retained earnings100100$300$250Cash$5
22、0$250Shares in S Ltd250_-$300$250Q:what are the assets,and equity of the economic entity?22The elimination entryWe cannot simply add the financial statements together:P Ltd S LtdSumShare capital$200$150$350Retained earnings100100200$300$250$550Cash$50$250$300Shares in S Ltd250_-250$300$250$55023The
23、elimination entryThe economic entitys financial position is:Share capital$200(Capital of P Ltd)Ret.earnings100(Ret.earnings of P Ltd)$300Cash$300(P Ltd+S Ltd)When adding the financial statements together we need to make adjustments.24The elimination entryAdjustments:(a)Eliminate“Shares in S Ltd”An e
24、ntity cannot show shares in itself as an asset.Shares in S cannot appear on the group balance sheet.(b)Eliminate the equity of S Ltd existing at acquisition date i.e.the pre-acquisition equityIncluding both the net assets of S Ltd and the equity accounts of S at the acquisition date would double-cou
25、nt the net assets of S.25The elimination entryThis entry eliminates the investment account of the parent entity(“Shares in S Ltd”)and the parent companys 100%interest in the acquisition-date equity of the subsidiary:Share CapitalDr150Retained EarningsDr100Shares in S LtdCr25026P LtdS LtdDrCrConsolCa
26、pital200150150200Ret.earnings100_100_100100_300250300Cash50250300Shares in S Ltd250-250-30025030027The elimination entryThe elimination entry can be prepared using an acquisition analysis:At 1 July 2004:FV of net assets of S Ltd =$250 cash ($150 capital+$100 ret.earn.)FV acquired by P Ltd =100%x$250
27、 =$250Cost of acquisition =$250Goodwill/Gain on bargain purchase=zero28The elimination entryAssume in the 2004-5 period that S Ltd records a net profit after tax of$75.These are all post-acquisition profits they do not affect the elimination entry.The consolidated financial statements show only the
28、post-acquisition equity of the subsidiary.ALL pre-acquisition equity of the subsidiary is eliminated on consolidation.29P LtdS LtdDrCrConsolRet.earnings220175100295Capital200150150200420325495Cash170325495Shares in S Ltd250-250-42032549530The elimination entryThe entry at 30/6/05 is:Retained Profits
29、(1/7/04)Dr100Share CapitalDr150Shares in S LtdCr250At 30/6/06:Retained Profits(1/7/05)Dr100Share CapitalDr150Shares in S LtdCr250Needs to be repeated in each years worksheet31Dividends from pre-acquisition equitynDividends paid by a subsidiary out of pre-acquisition profits i.e.from the balance of r
30、etained earnings existing at the acquisition date are not treated as revenue by the parent company but as a reduction of the carrying amount of“Shares in S Ltd”.nNB.P Ltd will never pay a dividend to S Ltd.Why?32Dividends from pre-acquisition equitynBefore doing the substitution elimination entry we
31、 need to determine if“Shares in S”has been written down by the amount of a pre-acquisition dividend paid by S to P.nCompare the carrying amount of“Shares in S”with the purchase price paid by P.nIf“Shares in S”has been written down we must reverse this write-down and bring“Shares in S”back to the ori
32、ginal cost.33Dividends from pre-acquisition equitynIn the books of S the net effect of declaring and paying a dividend from pre-acquisition profits is:Dr Retained earningsxxxCr BankxxxnIn the books of P the net effect of receiving this dividend is:Dr BankxxxCr Shares in Sxxx34Dividends from pre-acqu
33、isition equitynWhy doesnt P credit a revenue account with the amount of the dividend?nBecause P will treat the dividend as a partial return of the purchase price it paid for its asset“Shares in S”.nTo reverse the effect of this transaction:Dr Shares in SxxxCr Retained profits(opening)xxx(if dividend
34、 was paid in a previous period)35Dividends from pre-acquisition equitynIf the dividend was declared and paid in the current period:Dr Shares In SxxxCr Interim dividend paid*xxx*a negative appropriation account36Dividends from pre-acquisition equityP owns 100%of S.On 1 June,S declares a final dividen
35、d of$30 which will be paid in August.This is recorded:In S Ltds records:Dr Final dividend provided 30Cr Dividend payable30In P Ltds records:Dr Dividend receivable 30Cr Shares in S Ltd3037Dividends from pre-acquisition equitynTo reverse these entries at date of consolidation:Dr Shares in S30Cr Divide
36、nd receivable30Dr Dividend payable30Cr Final dividend provided3038 Goodwilln“Goodwill on consolidation”arises when the cost of the investment in a subsidiary is greater than the total fair value of the net assets acquired.It appears only on the consolidated balance sheet.nThe elimination journal ent
37、ry will include a balancing debit to goodwill.39GoodwillAcquisition analysis at 1/7/04:FV of NA of S Ltd=$150+$100=$250Cost of acquisition=$300Goodwill=$300-$250=$50At 1 July 2004,P Ltd paid$300 for ALL the issued shares of S Ltd when the equity of S Ltd was:Share capital$150Retained earnings10040Go
38、odwillThe elimination entry at 1/7/04:Retained Earnings Dr100Share CapitalDr150GoodwillDr50Shares in S LtdCr30041P LtdS LtdDrCrConsolCapital200150150200Ret.earning100100100100300250300Cash-250250Shares in S Ltd300-300-Goodwill505030025030042Goodwill30/6/05Dr Impairment Loss5Cr Accumulated Impairment
39、 Losses 5Remember the elimination entry will also have to be done.The directors determine that goodwill has been impaired by$5 on 30/6/0543Gain on bargain purchaseThis arises when the purchase price of the investment is less than the total fair value of the net assets acquired.Before gain on bargain
40、 purchase is recognised,AASB 3 requires that the acquirer shall reassess the procedure to ensure there is a gain.44 Gain on bargain purchase On 1/7/04,P Ltd paid$273 for the shares of S Ltd when the records of S Ltd showed:Capital$150Land$200Retained earnings 150Plant100$300$300All assets are record
41、ed at fair value45Gain on bargain purchaseAcquisition analysis at 1/7/04:FV of net assets of S Ltd =$150+$150 =$300Cost of acquisition =$273Gain on bargain purchase =$2746Gain on bargain purchase Substitution elimination entry at 1/7/04:Ret EarningsDr150Share CapitalDr150Excess(P&L)Cr27Shares in S LtdCr273