Presentation on theme: "Chapter 23 Preparation of Consolidated Statements of Financial Position after the Date of Acquisition."— Presentation transcript:
1 Chapter 23Preparation of Consolidated Statements of Financial Position after the Date of Acquisition
2 Objectives By the end of this chapter, the reader should be able to: account for the post-acquisition profits of a subsidiary;eliminate inter-company balances and deal with reconciling items;account for unrealised profits on inter-company transactions.
3 Pre- and post-acquisition profits Pre-acquisition profitsMade before date in which parent acquired controlRepresent net assets at acquisition dateAre dealt with through goodwill calculationPost-acquisition profitsMade after date of acquisitionInclude consolidated income statement.
4 Example: Bend Group – pp.606-607 (pp.421-422) 1 January 20X1Bend acquired 80% of the 10,000 £1 common shares in Stretch plcInvestment in Stretch cost £12,000Retained earnings were £4,000Fair value of the non-controlling interest at the date of acquisition was £2,950Fair value of non-current assets was £600 above book value.
5 The Bend Group statement of financial position at 31 December
7 Total goodwill calculation Fair value of non-controlling interest at date of acquisition2,95020% of net assets at date of acquisition (10, , )(2,920)Goodwill attributable to the non-controlling interest30Total goodwill (£320 + £30)
8 The Bend Group non-controlling interest calculation Non-controlling interest in goodwillNon-controlling interest ,350
9 The Bend Group asset aggregation 35055,950(parent company only)(parent company)
10 Inter-company balances Preferred shares held by parentBonds held by parentInter-company trading and loan balancesInter-company dividends payable/receivable.
11 Preferred shares held by parent Preferred shares acquired on the acquisitionRepresented by net assets at date of acquisitionDealt with through goodwillPreferred shares not acquiredPart of non-controlling interests
12 Bonds held by parent Bonds acquired on the acquisition Represented by net assets at date of acquisitionDealt with through goodwillAppear in balance sheet as long-term loan (Liability).
13 Inter-company trading and loan balances Reconcile balance in parent with subsidiaryShould be the sameTiming differences such as cash in transitUpdate to make balances equalEliminate the inter-company balancesSubsidiary as debtor in parent balance sheet; parent as creditor in subsidiary balance sheet.
14 Example: Prose Group – pp.610-614 (pp.425-428) 1 January 20X1Prose acquired in Verse80% of the 10,000 £1 common shares for £21,10020% of preferred shares for £2,00010% of the bonds for £900Retained earnings were £4,000Fair value of non-current assets was £1,000 > BV.
15 Example – the Prose Group (Continued) During 20X1Prose sold inventory to Verse for £3,000This was at cost plus 25%Half was still in inventory at 31 DecemberGroup accounting policiesIncrease non-current assets by 100% of excess.
23 Uniform accounting policies Parent and subsidiary to use uniform policiesAccounts with year ends within 3 months of each otherSubject to adjustment for significant transactions.
24 Review questions The 2006 accounts of Eybl International state: Elimination of intra-group balancesAdvances arising in the course of business between the companies included in the consolidation are eliminated.(a) Discuss three examples of inter-company (also referred to as intra-group) accounts(b) Explain what is meant by ‘have been eliminated’(c) Explain what effect there could be on the reported group profit if inter-company transactions were not eliminated.
25 Review questions (Continued) Explain why the non-controlling interest is calculated as at the year-end whilst goodwill is calculated at the date of acquisition.Explain why pre-acquisition profits of a subsidiary are treated differently from post-acquisition profits.Explain the effect of a provision for unrealised profit on a non-controlling interest:(a) where the sale was made by the parent to the subsidiary and(b) where the sale was made by the subsidiary to the parent.