HUANG HUAI UNIVERSITY FINANCIAL ACCOUNTING 2 Lecture 2 2009/10

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HUANG HUAI UNIVERSITY

FINANCIAL ACCOUNTING 2


Lecture 2

2009/10

Consolidated Balance Sheets After
the Date of
Acquisition

DR. AZIZ JAAFAR

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)


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 policies

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 statement

Example


The Bend Group

1 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 value

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



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.

The Bend Group Goodwill calculation

The Bend Group Minority Interest calculation

The Bend Group asset aggregation

The Bend Group Capital and reserves

The Bend Group balance sheets at
31 December 2001

Inter
-
company balances


Preferred shares held by parent



Bonds held by parent



Inter
-
company trading and loan balances



Inter
-
company dividends payable/ receivable


Preferred shares held by parent



Preferred shares acquired on the acquisition


Represented by net assets at date of acquisition


Dealt with through Goodwill



Preferred shares not acquired


Part of Minority interest

Bonds held by parent



Bonds acquired on the acquisition


Represented by net assets at date of acquisition


Dealt with through Goodwill



Bonds not acquired on the acquisition


Appear in balance sheet as long
-
term loan

Inter
-
company trading and loan
balances


Reconcile balance in parent with subsidiary


Should 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 sheet

Inter
-
company Dividends payable/receivable


Dividend 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.

Unrealised Profit on inter
-
company Sales


Sales 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.

Example 2


The Prose Group

1 January 2001


Prose acquired in Verse


80% 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 BV

Example


The Prose Group


During 2001


Prose sold inventory to Verse for £3,000


This was at cost plus 25% (i.e., mark
-
up)


Half still in inventory at 31 December


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



50 750


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



50 750

The Prose Group


Goodwill calculation

The Prose Group


Inter
-
company
adjustments

The Prose Group


Minority interest


The Prose Group


Aggregate Assets

The Prose Group


Equity section

The Prose Group


Bonds

The Prose Group


Asset section

The Prose Group


Equity and liability section

Uniform accounting policies


Parent and subsidiary to use uniform policies



Accounts with year ends within 3 months of each other



Subject to adjusting for significant transactions

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 assets



Accounting for Goodwill


A 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