Lecture 2 200910 Consolidated Balance Sheets After the Date of Acquisition DR AZIZ JAAFAR Last lecture Definitions amp Rules on Group accounts Parent Subsidiary Group Concept of control ID: 656799
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HUANG HUAI UNIVERSITYFINANCIAL ACCOUNTING 2Lecture 22009/10
Consolidated Balance Sheets After the Date of
Acquisition
DR. AZIZ JAAFARSlide2
Last lecture:Definitions & Rules on Group accounts
Parent
Subsidiary
Group
Concept of ‘control’
Group balance sheets on the date of acquisition
Goodwill
Minority interests
Fair Value
≠ Book Value
of Assets (Revaluation)Slide3
Consolidated balance sheets after date of acquisition
Lecture covers:
Pre- and post-acquisition profits/losses
Inter-company balances
Unrealised profit on inter-company sales
Provision for unrealised profit affecting a minority
Uniform accounting policiesSlide4
Pre- and post-acquisition profits
Pre-acquisition profits
Made before date parent acquired control
Represent net assets at acquisition date
Dealt with through Goodwill calculation
Post-acquisition profits
Made after date of acquisition
Include in consolidated income statementSlide5
Example – The Bend Group1 January 2001
Bend acquired 80% of the 10,000 £1 common shares in Stretch for £1.50 per share
Investment in Stretch cost £12,000
Retained earnings were £4,000
Fair Value of Non-current assets £600 above book valueSlide6
Bend & Stretch balance sheets at 31 December 2001
Bend (P) Stretch (S)
ASSETS
Non-currents assets 26 000 12 000
Investment in Stretch 12 000 -
Net current assets
13 000
4 000
NET ASSETS
51 000
16 000
EQUITY
Common Share Capital 16 000 10 000
Retained Earnings
35 000
6 000
51 000
16 000
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Steps:1. Calculate Goodwill on consolidation:
(Compare the cost of acquisition and the Fair Value of sub’s Net Assets).
2. Calculate Minority Interest
3. Group Assets aggregation
4. Group Capital and Reserves – include parent’s share capital and reserves AND parent’s share of post-acquisition profit. Slide8
The Bend Group Goodwill calculationSlide9
The Bend Group Minority Interest calculationSlide10
The Bend Group asset aggregationSlide11
The Bend Group Capital and reservesSlide12
The Bend Group balance sheets at 31 December 2001Slide13
Inter-company balancesPreferred shares held by parentBonds held by parentInter-company trading and loan balances
Inter-company dividends payable/ receivableSlide14
Preferred shares held by parentPreferred shares acquired on the acquisitionRepresented by net assets at date of acquisition
Dealt with through Goodwill
Preferred shares not acquired
Part of Minority interestSlide15
Bonds held by parentBonds acquired on the acquisitionRepresented by net assets at date of acquisition
Dealt with through Goodwill
Bonds not acquired on the acquisition
Appear in balance sheet as long-term loanSlide16
Inter-company trading and loan balancesReconcile balance in parent with subsidiaryShould be the same Timing differences such as cash/stock in transit
Update to make balances equal
Eliminate the inter-company balances
Subsidiary as debtor in parent balance sheet; parent as creditor in subsidiary balance sheetSlide17
Inter-company Dividends payable/receivableDividend declared by subsidiary but not paid
Appear in subsidiary’s current liabilities as Dividend Payable
In Parent’s account – as Dividend Receivable (Current Assets)
In GROUP Balance sheet – cancelled off, i.e., the figure does not appear in the consolidated balance sheet. Slide18
Unrealised Profit on inter-company SalesSales transactions between parents and subsidiaries, specifically on the element of profit that has not been realised by the group if the goods have not been sold on to a third party before the year-end.
Example:
Big plc. buys £2000 worth of goods for resale and sells them to Small plc. for £2700, making a profit of £700. At year-end, if Small plc. still has these goods in stock, the group has not yet made any profit on these goods and the £700 is therefore said to be unrealised.
It must be removed from the group balance sheet by:
Reducing the retained earnings of Big plc. by £700;
Reducing the inventories of Small plc. by £700.Slide19
Example 2 – The Prose Group1 January 2001Prose acquired in Verse80% of the 10,000 £1 common shares for £21,100
20% of Preferred shares for £2,000
10% of the bonds for £900
Retained earnings were £4,000
Fair value of non-current assets was £1,000 above BVSlide20
Example – The Prose GroupDuring 2001Prose sold inventory to Verse for £3,000 This was at cost plus 25% (i.e., mark-up)
Half still in inventory at 31 DecemberSlide21
Prose and Verse Balance Sheets as at 31 December 2001 – Assets Section PROSE (P) VERSE (S)
ASSETS
Non-current Assets (including land) 25 920 43 400
Investment in Verse 24 000 -
Current Assets
Inventories 9 600 4 000
Verse Current Account 8 000
Bond interest receivable 35
Other current assets
1 965
3 350
NET ASSETS
69 520
50 750Slide22
Prose and Verse Balance Sheets as at 31 December 2001 – Equity & Liability Section PROSE (P) VERSE (S)
EQUITY AND LIABILITIES
Common share capital 22 000 10 000
Additional Paid-in Capital 2 000 1 000
Preferred Shares 4 000 8 000
Retained Earnings
30 000
8 500
58 000 27 500
Non-current liabilities
Bonds 5 000 7 000
Current liabilities
Prose Current Account 8 000
Bond interest payable 350
Other current liabilities
6 520
7 900
NET ASSETS
69 520
50 750Slide23
The Prose Group – Goodwill calculationSlide24
The Prose Group – Inter-company adjustmentsSlide25
The Prose Group – Minority interest Slide26
The Prose Group – Aggregate AssetsSlide27
The Prose Group – Equity sectionSlide28
The Prose Group – BondsSlide29
The Prose Group – Asset sectionSlide30
The Prose Group – Equity and liability sectionSlide31
Uniform accounting policiesParent and subsidiary to use uniform policiesAccounts with year ends within 3 months of each other
Subject to adjusting for significant transactionsSlide32
Purchased Goodwill/Goodwill on Consolidation
Goodwill has an objective valuation when a business is sold.
Purchased goodwill is based on transaction with third party at arm’s length
Goodwill is recognised by the acquirer as an asset from the acquisition date and is initially measured as the excess of the cost of the business combination over the acquirer's share of the net fair values of the acquiree's identifiable assets, liabilities and contingent liabilities.
Purchased goodwill should be initially capitalised as assetsSlide33
Accounting for GoodwillA number of approaches:
Capitalisation with annual impairment (IFRS 3)
Writing off directly to reserves in the year of acquisition
Writing off directly to the income statement in the year of acquisition
Amortising the goodwill over its expected life
Permanent capitalisation: keeping the goodwill in the balance sheet unchanged (i.e., no amortisation and no impairment)
IFRS 3 prohibits the amortisation of goodwill. Instead goodwill must be tested for impairment at least annually in accordance with IAS 36 Impairment of Assets