Lecture1-5 Consolidated financial statement
Lecture 1 Subsidiary and acquisition accounting
Subsidiary: an entity that is controlled by the parent entity. Control is presumed when the parent
owns >50% of the voting power of another entity.
IFRS 10: Control: an acquirer or investor controls an acquiree when it is exposed or has right to
variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee.
De facto control: Control when the parent company does not have the majority of voting rights
sometimes even when < 50% of voting rights.
Consolidated Financial Statement: The objective it to present the results and state of affairs of
the parent and subsidiaries as if they were one entity.
To provide a better picture of the group as a whole and give an overview of the group’s financial
position and performance for investors and other entities. To demonstrate the health of the
business as a whole and impact of each subsidiary to parent company. To prevent the misleading
accounts. Eg. Distortion of H’s profits by dividends from S, or sales to S
Hiding off-balance sheet liabilities
Goodwill: Any difference between the cost of the business combination and the acquirer’s
interest in the fair value of the net assets.
Non-controlling interest: The part of the net assets owned by shareholders other than the holding
company.
Lecture 2
Two concepts: 1. Proprietary concept: Group acs prepared for use by shareholders of parent
2. Entity concept: No distinction between the group and the minority shareholders
Acquisition Accounting Method:
1. Proprietary concept method: a. Fair value of assets and goodwill relating to the parent co
share. b. Minority interest share of asset NBV only
2. Entity concept method: a. Fair value of assets and goodwill relating to all shareholder
included b. Minority interest share of full purchase consideration
3. Parent co extension method: a. Goodwill relating to parent co share only but minority
interest share of asset at fair value
4. Proportional consolidation method: a. excludes minority interest completely from
consolidated financial statement
Lecture 3
Inter-group transaction:
Unrealized profit: treat any unrealized profit by reducing the group inventory and reducing the
retained profit figure. But we need to be careful of whether it is parent sells to subsidiary or
vice versa. In the consolidation process, the unrealized profit is added to cost of sales to
achieve the reduction in group gross profit.
Unrealized sales: This avoids the possibility that the group could inflate its revenue merely
by group companies selling to each other.
Dividend and interest: Eliminate any dividends (and interest if any) that have been credited in
the parent’s statement of income for amount paid or payable to parent by the subsidiaries
, Consolidated Profit and Loss account
Merger accounting method (merger accounting/ pooling of interests): IFRS 3: control whole of net
assets and operations, mutual sharing risks and benefits, neither party can be identified as acquirer
No goodwill, No share premium.
IFRS 3 has now disallowed its use: This result mainly from the accounting standard setters
seeking to stop the abuse of existing rules on merger accounting. Acquiring companies found
many ways to circumvent the rules designed to properly distinguish ‘acquisitions’ and genuine
‘mergers’
In practice, however, merger accounting may be used in internal reorganizations with a group.
Lecture 4 Associate and equity accounting (IAS 28)
Associate: An enterprise in which investor has significant influence and which is neither a
subsidiary nor an interest in the joint venture.
Significant influence: Power to participate in financial and operating policy decisions but not
control or joint control over these policies. It is presumed by directly or indirectly owns >= 20%
voting rights of the investee. Or evidence: (IAS 28) 1. Representation on the board of director or
equivalent governing body of the investee. 2. Participation in the policy making process. 3.
Material transaction between the investor and investee. 4. Interchange of manageable personnel.
5. Provision the essential technical information
Equity accounting: provides the users more information than simply recording the
investment at cost and accounting for any dividends from the investment.
Lecture 5 Joint-venture
IFRS 11
A joint arrangement: an arrangement which of two or more parties have joint control.
Joint control: the contractually agreed sharing of control of the arrangement, which exists only
when decisions about the relevant activities requires the unanimous consent of the parties sharing
control (para.7)
Types of joint arrangement: joint operations & joint venture
Joint operation: joint arrangement where the parties have joint control have rights to the assets; the
obligations for the liabilities.
Joint venture: joint arrangement where the parties have joint control have rights to the net assets of
arrangement.
Lecture 6 Foreign currency translation
Accounting issues:
- Accounting for the foreign transactions in the accounting records (if the exchange rate
changes between the date of the transaction and the date of the settlement, then difference of
the exchange should be dealt with) ---this requires foreign currency conversion
- Accounting for business combinations (if a subsidiary reporting using a different currency
than the parent, how should this issue be dealt with?) ---this requires foreign currency
translation
Foreign currency translation
Functional currency & Presentation currency
Lecture 1 Subsidiary and acquisition accounting
Subsidiary: an entity that is controlled by the parent entity. Control is presumed when the parent
owns >50% of the voting power of another entity.
IFRS 10: Control: an acquirer or investor controls an acquiree when it is exposed or has right to
variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee.
De facto control: Control when the parent company does not have the majority of voting rights
sometimes even when < 50% of voting rights.
Consolidated Financial Statement: The objective it to present the results and state of affairs of
the parent and subsidiaries as if they were one entity.
To provide a better picture of the group as a whole and give an overview of the group’s financial
position and performance for investors and other entities. To demonstrate the health of the
business as a whole and impact of each subsidiary to parent company. To prevent the misleading
accounts. Eg. Distortion of H’s profits by dividends from S, or sales to S
Hiding off-balance sheet liabilities
Goodwill: Any difference between the cost of the business combination and the acquirer’s
interest in the fair value of the net assets.
Non-controlling interest: The part of the net assets owned by shareholders other than the holding
company.
Lecture 2
Two concepts: 1. Proprietary concept: Group acs prepared for use by shareholders of parent
2. Entity concept: No distinction between the group and the minority shareholders
Acquisition Accounting Method:
1. Proprietary concept method: a. Fair value of assets and goodwill relating to the parent co
share. b. Minority interest share of asset NBV only
2. Entity concept method: a. Fair value of assets and goodwill relating to all shareholder
included b. Minority interest share of full purchase consideration
3. Parent co extension method: a. Goodwill relating to parent co share only but minority
interest share of asset at fair value
4. Proportional consolidation method: a. excludes minority interest completely from
consolidated financial statement
Lecture 3
Inter-group transaction:
Unrealized profit: treat any unrealized profit by reducing the group inventory and reducing the
retained profit figure. But we need to be careful of whether it is parent sells to subsidiary or
vice versa. In the consolidation process, the unrealized profit is added to cost of sales to
achieve the reduction in group gross profit.
Unrealized sales: This avoids the possibility that the group could inflate its revenue merely
by group companies selling to each other.
Dividend and interest: Eliminate any dividends (and interest if any) that have been credited in
the parent’s statement of income for amount paid or payable to parent by the subsidiaries
, Consolidated Profit and Loss account
Merger accounting method (merger accounting/ pooling of interests): IFRS 3: control whole of net
assets and operations, mutual sharing risks and benefits, neither party can be identified as acquirer
No goodwill, No share premium.
IFRS 3 has now disallowed its use: This result mainly from the accounting standard setters
seeking to stop the abuse of existing rules on merger accounting. Acquiring companies found
many ways to circumvent the rules designed to properly distinguish ‘acquisitions’ and genuine
‘mergers’
In practice, however, merger accounting may be used in internal reorganizations with a group.
Lecture 4 Associate and equity accounting (IAS 28)
Associate: An enterprise in which investor has significant influence and which is neither a
subsidiary nor an interest in the joint venture.
Significant influence: Power to participate in financial and operating policy decisions but not
control or joint control over these policies. It is presumed by directly or indirectly owns >= 20%
voting rights of the investee. Or evidence: (IAS 28) 1. Representation on the board of director or
equivalent governing body of the investee. 2. Participation in the policy making process. 3.
Material transaction between the investor and investee. 4. Interchange of manageable personnel.
5. Provision the essential technical information
Equity accounting: provides the users more information than simply recording the
investment at cost and accounting for any dividends from the investment.
Lecture 5 Joint-venture
IFRS 11
A joint arrangement: an arrangement which of two or more parties have joint control.
Joint control: the contractually agreed sharing of control of the arrangement, which exists only
when decisions about the relevant activities requires the unanimous consent of the parties sharing
control (para.7)
Types of joint arrangement: joint operations & joint venture
Joint operation: joint arrangement where the parties have joint control have rights to the assets; the
obligations for the liabilities.
Joint venture: joint arrangement where the parties have joint control have rights to the net assets of
arrangement.
Lecture 6 Foreign currency translation
Accounting issues:
- Accounting for the foreign transactions in the accounting records (if the exchange rate
changes between the date of the transaction and the date of the settlement, then difference of
the exchange should be dealt with) ---this requires foreign currency conversion
- Accounting for business combinations (if a subsidiary reporting using a different currency
than the parent, how should this issue be dealt with?) ---this requires foreign currency
translation
Foreign currency translation
Functional currency & Presentation currency
