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Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–1 Chapter 28 Further consolidation issues II:

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Presentation on theme: "Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–1 Chapter 28 Further consolidation issues II:"— Presentation transcript:

1 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–1 Chapter 28 Further consolidation issues II: Accounting for indirect interests and changes in degree of ownership of a subsidiary

2 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–2 Learning objectives Understand that the determination of the total ownership interest in a subsidiary must take account of both direct and indirect ownership interests Understand what an indirect equity ownership represents and how it is calculated Understand that the parent entitys interest in the post-acquisition movements of a subsidiarys retained profits and other reserves will be based upon the sum of the direct and indirect ownership interests Continues/ …

3 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–3 Learning objectives (cont.) Understand that even in the presence of indirect ownership interests, the pre-acquisition capital and reserves of a subsidiary will be eliminated on consolidation on the basis of only the direct ownership interests Understand how to account for incremental investments in a subsidiary Understand how to account for the disposal of a subsidiary from the perspective of both the parent entity and the economic entity

4 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–4 Status of newly converged accounting standards From 2005, the new standard is AASB 127 Consolidated and Separate Financial Statements – This replaced AASB 1024 Consolidated Accounts There are two other standards of particular relevance: 1. AASB 3 Business Combinations 2. AASB 138 Intangible Assets

5 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–5 Indirect ownership interests AASB 127 requires that: – the consolidated financial report include all subsidiaries of the parent Subsidiary defined as (AASB 127): – an entity (including a partnership) that is controlled by another entity (the parent) Control: – is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities – can arise through indirect interests, i.e. without any direct ownership interest Continues/ …

6 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–6 Indirect ownership interests (cont.) Example of an indirect interest: – Insert Figure 28.1 Continues/ …

7 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–7 Indirect ownership interests (cont.) Minority interests: – are that portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned by the parent Also possible to hold both direct and indirect interests in a particular entity: – Insert Figure 28.2 Continues/ …

8 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–8 Indirect ownership interests (cont.) Consolidation in the presence of indirect interests: – Refer to Worked Example 28.1 Choice of two methods in performing consolidation: 1.Sequential-consolidation approach –Consolidation of each separate legal entity with its controlled entities is performed sequentially (time-consuming and messy) 2.Multiple-consolidation approach –In eliminating investments held by the immediate parent entities only direct interests are taken into account –Post-acquisition movements in subsidiaries shareholders funds allocated to ultimate parent entity on basis of sum of direct and indirect interests Continues/ …

9 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–9 Indirect ownership interests (cont.) Journal entries To eliminate parents investment in subsidiary: DebitShare capital DebitRetained earnings Debit Goodwill CreditInvestment in subsidiary To recognise impairment of goodwill associated with acquisition: DebitImpairment expensegoodwill CreditAccumulated impairment lossesgoodwill Continues/ …

10 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–10 Indirect ownership interests (cont.) Journal entries (cont.) To eliminate dividends proposed by subsidiary: DebitDividend payable (balance sheet) CreditDividend proposed (income statement) Debit Dividend revenue (income statement) CreditDividend receivable (balance sheet) Continues/ …

11 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–11 Indirect ownership interests (cont.) Minority interests (AASB 127): – to be presented separately from the parent shareholders equity in the consolidated balance sheet within equity – to be separately disclosed in the profit or loss of the group

12 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–12 Increase in the ownership interest held in a subsidiary Parent entity might acquire additional shares in a subsidiary over time AASB 3 requires: – each exchange transaction to be treated separately by the acquirer – that the cost of the transaction and fair value information at the date of the transaction be used to determine the amount of any goodwill – results in a step-by-step comparison of the cost of the individual investments Refer to Worked Example 28.2 Continues/ …

13 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–13 Increase in the ownership interest held in a subsidiary (cont.) Journal entires To eliminate investment in subsidiary and recognise goodwill (each acquisition to be accounted for separately): DebitShare capital DebitRetained earnings DebitGoodwill CreditInvestment in subsidiary Continues/ …

14 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–14 Increase in the ownership interest held in a subsidiary (cont.) Journal entires (cont.) To recognise impairment of goodwill (separately for each acquisition): DebitImpairment lossgoodwill CreditAccumulated impairment lossesgoodwill Continues/ …

15 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–15 Increase in the ownership interest held in a subsidiary (cont.) To eliminate dividends proposed by subsidiary: DebitDividend payable (balance sheet) CreditDividend proposed (income statement) Debit Dividend income (income statement) CreditDividend receivable (balance sheet)

16 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–16 Sale of shares in a subsidiary When a parent entity sells shares in a subsidiary: – profit or loss in its own individual accounts will be different from that in consolidated accounts AASB 127 requires investments in subsidiaries etc. to be measured at either: – cost; or – in accordance with AASB 139, i.e. at fair value Continues/ …

17 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–17 Sale of shares in a subsidiary (cont.) From the parents perspective, profit or loss on sale of shares is the difference between: – carrying value of shares; and – value of sales proceeds Carrying value: – is the amount shown in the financial statements for a particular asset or liability From groups perspective – Consideration to be given to economic entitys share of post-acquisition profits and reserve movements before determining profit or loss on sale of shares Continues/ …

18 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–18 Sale of shares in a subsidiary (cont.) Refer to Worked Example 28.3 Journal entries To record sale of shares in parents journal: DebitCash CreditInvestment in subsidiary CreditProfit on sale of investment Continues/ …

19 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–19 Sale of shares in a subsidiary (cont.) Consolidation adjusting journal entries: DebitProfit on sale of investment Debit Loss on sale of subsidiary CreditProfit after tax CreditRetained profits CreditRevaluation reserve Balance in revaluation reserve can be transferred to retained profits: DebitRevaluation reserve CreditRetained profits Continues/ …

20 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–20 Sale of shares in a subsidiary (cont.) Discount generated on consolidation – Refer to Worked Example 28.4 Consolidation journal entries To eliminate the first acquisition: DebitShare capital CreditInvestment in subsidiary To record assets at fair value in relation to acquisition: DebitProperty, plant and equipment CreditRevaluation reserve Continues/ …

21 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–21 Sale of shares in a subsidiary (cont.) Consolidation journal entries (cont.) To eliminate the second acquisition: DebitShare capital Debit Capital profits reserve Debit Retained profits Debit Revaluation reserve CreditInvestment in subsidiary CreditDiscount on acquisition Continues/ …

22 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–22 Sale of shares in a subsidiary (cont.) Consolidation journal entries (cont.) To eliminate discount on acquisition and treat it as part of income: DebitDiscount on acquisition CreditGain on acquisition of investments

23 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–23 Summary The chapter considers how to account for indirect interests and changes in the degree of ownership in a subsidiary It is possible to control another entity without direct ownership, i.e. through an indirect ownership interest In accounting for additional acquisitions of shares, on consolidation, each investment acquisition must be eliminated separately When shares in a subsidiary are sold, profit or loss in individual investors accounts will be different from that in the consolidated accounts

24 Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–24 Summary of main changes to accounting standards AASB 127 Consolidated and Separate Financial Statements is generally consistent with AASB 1024 Consolidated Accounts Significant changes – Goodwill amortisation is prohibited and goodwill must be subject to regular impairment testing – Discounts on acquisition now to be treated as part of the profit or loss of the reporting period – Outside equity interests now referred to as minority interests


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