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HUANG HUAI UNIVERSITY FINANCIAL ACCOUNTING 2 HUANG HUAI UNIVERSITY FINANCIAL ACCOUNTING 2

HUANG HUAI UNIVERSITY FINANCIAL ACCOUNTING 2 - PowerPoint Presentation

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HUANG HUAI UNIVERSITY FINANCIAL ACCOUNTING 2 - PPT Presentation

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

assets 000 acquisition group 000 assets group acquisition goodwill prose balance current company bend inter net date shares profit

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Slide1

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

Slide7

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