Chapter 10 Consolidations

Group Structures A Parent entity An entity that controls another entity. This is the Holding Company. Control The capacity to dominate decision-making. The Ultimate Parent The entity that is not controlled by another.

Subsidiary Companies A subsidiary company is controlled by a parent company. A subsidiary that is directly or indirectly controlled by the ultimate parent is part of the consolidated group.

Group Structures A Ltd is the Ultimate Parent Company A Ltd ‘Parent’ B Ltd 100% owned by A Ltd ‘Son’ C Ltd 100% owned by B Ltd Grandson A Ltd is the Ultimate Parent Company B Ltd is a 100% subsidiary of A Ltd C Ltd is indirectly held by A Ltd and is deemed a subsidiary of A Ltd.

10.1 The purpose of the AASB 127

The Purpose of AASB 127 The purpose of AASB 127 is : to identify parent entities and subsidiaries to identify when consolidated accounts are prepared what information to include

The General Principles of Consolidation 10.2 The General Principles of Consolidation

The General Principles of Consolidation Consolidated financial statements are compiled by combining financial statements of an entity (parent and subsidiaries). This process is carried out at the end of the financial year.

The General Principles of Consolidation The parent company prepares group accounts for itself and all its subsidiaries. The parent company produces a: Consolidated financial statement Income Statement Statement of Financial Position Statement of Cash Flows Notes

The General Principles of Consolidation All the individual companies in the group will still produce their own set of financial statements each year. Inter-company transactions are eliminated, only outside transactions should be shown.

Control is indicated by: Ownership of voting shares 50% or greater (although ownership does not necessarily equate to control); Ability to control the decision making of the company; Majority representation on the board of directors.

Wholly Owned Subsidiary When one company acquires all the shares of the Subsidiary we say that the Parent Company has 100% ownership interest in the Subsidiary. In this situation all inter-company transactions are fully eliminated.

Inter-Company Investment Equity The parent company’s full value of its investments in the subsidiary is eliminated against the equity of the subsidiary at acquisition date. Elimination on consolidation is:

Example

Cost of investment above fair value When a company acquires another company and pays more than the fair value for the net assets, goodwill arises.

Example

Impairment of Goodwill The amount of impairment expense is equal to the carrying amount less the recoverable amount.

Cost of Investment Below Fair Value When a company pays less for a company than the fair values of that other company’s assets, a gain or excess over cost arises. This gain must be immediately taken to the profit and loss under AASB 3 Business Combinations.

Inter-Company Dividends AASB 127 states: An entity shall recognise a dividend from a subsidiary in profit or loss in its separate financial statements when its right to receive the dividend is established.

Interim Dividends If the company pays an interim dividend, an entry is necessary to eliminate the dividend paid and declared by the subsidiary company. On consolidation the entry is:

Final Dividend Declared (But Not Paid)

Final Dividend Paid

Inter-Company Sales and Purchases Sales and purchases of inventory within the group must be recorded as a Sales entry and Purchase entry respectivley.

Example

Inter-company Unrealised Profit (Closing inventory) An adjustment is made for any profit in inventory (resulting from inter-company sales and purchases) which remains unsold by the group at the end of the financial year.

Inter-company Unrealised Profit (Opening Balance) Any unrealised profits from inter-company transactions in the opening inventory are eliminated. Example Hanson Ltd sold inventory to Hi-Five Ltd during the 2011 financial year, which remained unsold by Hi-Five Ltd at 30 June 2011. The unrealised profit on this inventory is $10,000. The elimination entry at 30 June 2012 is:

Inter-Company Loans These are inter-company transactions that must be eliminated as there is no external obligation. The loan would be an asset of the lender and liability of the borrower.

Inter-Company Service/Management Fees Companies within a group will often provide services to each other. Profit and expense are recorded as a result. The transaction, however, must be eliminated.

Profit on Sale of Non-Current Asset If an asset is transferred from one group company to another the asset is still within the group. Therefore any unrealised profit or loss on transfer must be eliminated.

Under/Excess Depreciation of Non-Current Asset If the asset transferred is depreciable, the depreciation needs to be adjusted too. Under depreciation: Excess depreciation: