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Chapter 25 Changes to Parent Investment in Subsidiaries.

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Presentation on theme: "Chapter 25 Changes to Parent Investment in Subsidiaries."— Presentation transcript:

1 Chapter 25 Changes to Parent Investment in Subsidiaries

2 Lecture Topics Bonus issue by subsidiary Purchase of additional shares of a subsidiary Parent disinvestment Other matters

3 Lecture References Text- Chapter 25 AASB- 1024

4 Key Concepts Bonus issue Rights issue Disinvestment Loss of control

5 Bonus Issues by Subsidiary Retained profit and reserves may be used Total owner’s equity unchanged Issued pro-rata to existing shareholders

6 Bonus Issues by Subsidiary DrDividend equalisation reservex DrGeneral reservex DrRetained profitsx CrShare capitalxx bonus issue of shares from reserves and retained profits DrDividend equalisation reservex DrGeneral reservex DrRetained profitsx CrShare capitalxx bonus issue of shares from reserves and retained profits

7 Bonus Issues by Subsidiary Bonus from pre-control reserves – Pre-control reserves and profits always treated as capital and eliminated – Bonus has minimal impact on consolidation – Cosmetic change to elimination entry

8 Bonus Issues by Subsidiary Bonus from post-control reserves – All equity eliminated on consolidation – Bonus issue increases and overstates equity eliminated – Corrected via ‘consolidation reserve’

9 Bonus Issues by Subsidiary - example Tom acquired 80% of Jerry for $72000 Jerry makes 1 for 5 bonus issue Should issue be from pre or post control equity?

10 Equity of Jerry (a) (b) at before purchase bonus $ paid-up capital contingencies reserve reserves profits owner’s equity Bonus issue by subsidiary - pre-control equity

11 Equity of Jerry (a) (b) (c) at beforeafter purchase bonusbonus $ $ $ paid-up capital contingencies reserve reserves profits owner’s equity Bonus issue by subsidiary - pre-control equity

12 Parent interest purchased Equity of Jerry and eliminated (a) (b) (c) (d) at beforeafterbefore purchase bonusbonusbonus $ $ $ $ paid-up capital contingencies reserve reserves profits owner’s equity Bonus issue by subsidiary - pre-control equity

13 Parent interest purchased Equity of Jerry and eliminated (a) (b) (c) (d) (e) at beforeafterbeforeafter purchase bonusbonusbonusbonus $ $ $ $ $ paid-up capital contingencies reserve reserves profits owner’s equity Bonus issue by subsidiary - pre-control equity

14 DrOwner’s equity components56000 (per columns (d) or (e)) Dr Consolidation Goodwill CrInvestment in Jerry72000 DrOwner’s equity components56000 (per columns (d) or (e)) Dr Consolidation Goodwill CrInvestment in Jerry72000 Elimination entry

15 Equity of Jerry (a) (b) (c) at beforeafter purchasebonusbonus $ $ $ paid-up capital contingencies reserve reserves profits owner’s equity Bonus issue by subsidiary - post-control equity

16 Parent interest purchased Equity of Jerry and eliminated (a) (b) (c) (d) (e) at beforeafterbeforeafter purchasebonusbonusbonusbonus $ $ $ $ $ paid-up capital contingencies reserve reserves profits owner’s equity Bonus issue by subsidiary - post-control equity

17 after bonus: DrOwner’s equity62400 DrConsolidation Goodwill CrInvestment in Jerry72000 CrConsolidation reserve6400 before bonus: DrOwner’s equity56000 DrConsolidation Goodwill CrInvestment in Jerry72000 before bonus: DrOwner’s equity56000 DrConsolidation Goodwill CrInvestment in Jerry72000

18 OEI in equity of Jerry at beforeafter purchasebonusbonus $ $ $ Paid-up capital All other equity OEI OEI in equity of Jerry at beforeafter purchasebonusbonus $ $ $ Paid-up capital All other equity OEI

19 Purchase of Additional Shares of a Subsidiary Additional purchase of existing shares – Sale to parent of part of OEI – Elimination entry refers to % ownership acquired in each case

20 Purchase of Additional Shares of a Subsidiary - example Purcell owns 85% of Byrd – Purchased 70% 30/6/X0 - $ Retained profits $ – Purchased 15% - $ Retained profits $ – No dividends have been paid

21 Parent interest Equity of Byrd purchased and eliminated X0 X0 70% $ Paid-up capital Profits Equity eliminated82600 Investment cost90000 Consolidation difference (Goodwill)7400

22 Parent interest Equity of Byrd purchased and eliminated X0 X3 X0 X3 70%15% $ $ Paid-up capital Profits Equity eliminated Investment cost Consolidation difference (Goodwill)

23 Parent interest Equity of Byrd purchased and eliminated X0 X3 X0 X3X3 70%15%85% $ $ $ $ $ Paid-up capital Profits Equity eliminated Investment cost Consolidation difference (Goodwill)

24 DrPaid-up capital85000 DrRetained profits20100 DrGoodwill on Cons CrInvestment in Byrd DrPaid-up capital85000 DrRetained profits20100 DrGoodwill on Cons CrInvestment in Byrd Entry to eliminate combined investment

25 Parent Subscribes to New Issue by Subsidiary Public offer or rights issue – Degree of ownership unchanged No impact on consolidation – Degree of ownership increased Transfer of interest from OEI to parent

26 Rights issue - example Purcell owns 85% of Byrd – 30/6/X3 Byrd announces 2 for 1 rights issue at $2 per share – No other equity transactions for Byrd

27 Parent interest Equity of Byrd purchased and eliminated 30/630/6 85% $ Paid-up capital Profits Equity eliminated Investment cost Consolidation difference (Goodwill)12400

28 Parent interest Equity of Byrd purchased and eliminated 30/631/7 30/6 31/7 85%85% new $ $ Paid-up capital Profits Equity eliminated Investment cost Consolidation difference (Goodwill)12400nil

29 Parent interest Equity of Byrd purchased and eliminated 30/631/7 30/6 31/731/7 85%85%85% new total $ $ $ $ $ Paid-up capital Profits Equity eliminated Investment cost Consolidation difference (Goodwill)12400nil 12400

30 Rights issue - example Purcell owns 85% of Byrd – 30/6/X3 Purcell buys all new shares – Purcell pays $1500 to buy rights of other shareholder

31 Parent interest Equity of Byrd purchased and eliminated 30/6 30/6 85% $ Paid-up capital Profits Equity eliminated Investment cost Consolidation difference (Goodwill)12400

32 Parent interest Equity of Byrd purchased and eliminated 30/631/7 30/6 31/7 85% 100% new $ $ Paid-up capital Profits Equity eliminated Investment cost Consolidation difference (Goodwill)

33 Parent interest Equity of Byrd purchased and eliminated 30/631/7 30/6 31/731/7 85% 100%90% newtotal $ $ $ $ $ Paid-up capital Profits Equity eliminated Investment cost Consolidation difference (Goodwill)

34 Parent Disinvestment Disinvestment by sale – Subsidiary - no change – Parent Deduct cost of shares sold from investment Record gain or loss

35 Parent Disinvestment Disinvestment by sale – Cost of shares sold? Calculate cost of particular shares sold Make flow assumption (eg. FIFO) Average

36 Parent Disinvestment Disinvestment by acquisition or inaction – Parent sells share in subsidiary – Subsidiary issue share and parent does not subscribe

37 Other Matters Inter-company transactions – Not affected by ownership changes – Distribution of the effects of profit eliminations based on new ownership percentages Aspects of control – Acquisitions preceding control – Disinvestment and loss of control

38 Where to get more information Other courses List books, articles, electronic sources


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