1. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-1 Chapter 28 Accounting for group structures

2. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-2 Objectives of this lecture Understand the reasons for preparing consolidated financial statements Understand the basics involved in preparing consolidated financial statements Be able to use a consolidation worksheet to perform relatively simple consolidations Understand that control, and not legal form, is the criterion for determining whether or not to consolidate an entity Be able to explain what control means, and be able to explain what factors should be considered in determining the existence of control

3. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-3 Objectives (cont.) Be able to provide the journal entries necessary to account for any goodwill or discount that arises on consolidation Be aware of some of the history behind the development of the accounting standards pertaining to consolidated financial statements

4. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-4 Introduction Common for groups of companies to combine in pursuit of common goals Where a reporting entity controls another entity, AASB 127 Consolidated and Separate Financial Statements requires that consolidated financial statements be prepared Key issues addressed in this topic –Rationale for presenting consolidated financial statements –Brief review of history of Australian consolidated accounting requirements –The importance of control in the decision to consolidate an entity –The basic mechanics of the consolidation process, together with consideration of how to account for any goodwill or gain on bargain purchased (formerly referred to as a discount) that might arise on consolidation

5. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-5 Rationale for consolidating the accounts of different legal entities Purpose of providing consolidated financial statements is to show the results and financial position of a group as if it were operating as a single economic entity Following the consolidation process, the consolidated statement of comprehensive income will show the result derived from operations with parties external to the group of entities Effects of all intragroup transactions are eliminated, since from the economic entity’s perspective (controlling or parent entity) income will not be derived as a result of transactions within the group, only from transactions with external parties

6. . Rationale for consolidating the accounts of different legal entities (cont.) The consolidated statement of financial position (balance sheet) will show the total assets controlled by the economic entity and the total liabilities owed to parties outside the economic entity Liabilities owing to organisations within the group (economic entity) by other group members will be eliminated in the consolidation process and will not be shown in the consolidated statement of financial position Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-6

7. . Figure 28.1—A simple parent and subsidiary relationship Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-7

8. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-8 History of Australian Accounting Standards that govern the preparation of consolidated financial statements AAS 24, issued June 1990 (following ED 40) AASB 1024, effective from 31 December 1991 Issued to eliminate practice of using partnerships and trusts to keep debt off consolidated balance sheet –Subsidiaries were defined as companies—any entity that was not a company could not be legally consolidated as it could not be included within the ‘group’ –Nor could entities controlled by a non-corporate entity be consolidated, even if the controlled entities happened to be companies

9. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-9 History of Australian Accounting Standards that govern the preparation of consolidated financial statements (cont.) Before amendments to the Corporations Law in 1991, group consolidated financial statements could only include entities that were companies Results in a ‘partition effect’ caused by, for example, interposing a unit trust within a group structure (refer to Figure 28.2 on p. 856)—everything from the trust down was partitioned off and excluded from the consolidation process Often had the effect of providing a consolidated balance sheet with lower debt ratios than would otherwise have been the case—not a ‘true and fair’ view of the financial position of the group

10. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-10 History of Australian Accounting Standards that govern the preparation of consolidated financial statements (cont.) Amendments to the Corporations Law deleted previous definitions of ‘group’ and ‘group accounts’ Corporations Act 2001 now adopts requirements embodied within AASB 127 S 295(2)(d) states that: The financial statements for the year are: (a) the financial statements in relation to the entity reported on that are required by the accounting standards, and (b) if required by the accounting standards—the financial statements in relation to the consolidated entity that are required by the accounting standards

11. . History of Australian Accounting Standards that govern the preparation of consolidated financial statements (cont.) That is, the Corporations Act now requires consolidated financial statements to be prepared in the manner required by Accounting Standards. Further, section 297 requires that the financial statements and notes for a financial year must give a true and fair view of the: (a) financial position and performance of the company, registered scheme or disclosing entity; and (b) if consolidated financial statements are required, the financial position and performance of the consolidated entity Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-11

12. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-12 History of Australian Accounting Standards that govern the preparation of consolidated financial statements (cont.) Consolidated entity defined in Corporations Act A company, registered management investment scheme or disclosing entity, together with all the entities it is required by accounting standards to include in consolidated financial statements Result Electing to present consolidated financial statements in different formats no longer an option AASB 127 provides that group accounts must be presented as one set of financial statements, which eliminates availability of alternatives previously available under The Corporations Law Consolidated financial statement defined as (AASB 127, par. 4): The financial statements of a group presented as those of a single economic entity

13. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-13 History of Australian Accounting Standards that govern the preparation of consolidated financial statements (cont.) AASB 127 (par. 12) The consolidated financial statements are to include all subsidiaries of the parent Note per AASB 127 Even where control is only temporary, the consolidated statements should incorporate the results of a subsidiary (entity controlled by a parent entity) during the time for which control existed, even if this was only for a small part of the year If control is lost during a period (AASB 127, par. 26) Income and expenses of a subsidiary are to be included in the consolidated financial statements until the date on which the parent ceases to control the subsidiary

14. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-14 Alternative consolidation concepts Generally speaking, there are three major consolidation concepts 1. The entity concept (adopted by AASB 127)  All assets and liabilities of the parent entity and subsidiaries included Non-controlling interests (formerly referred to as minority interests) are treated as part of consolidated equity Non-controlling interests defined by AASB 127 (par. 4) as ‘the equity in a subsidiary not attributable, directly or indirectly, to a parent’

15. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-15 Alternative consolidation concepts (cont.) Example of non-controlling interest: –Company A owned 80% of Company B—remaining 20% owned by unrelated entity, from perspective of Company A, non-controlling interest is 20% 2. The proprietary concept –All assets and liabilities of the parent entity and only a proportionate share of the subsidiaries’ assets and liabilities included –Non-controlling interest is not included

16. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-16 Alternative consolidation concepts (cont.) 3. The parent entity concept –All assets and liabilities of the parent and subsidiaries are included  Non-controlling interest typically treated as a liability AASB 127 requires adoption of the entity concept

17. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-17 Concept of control The definitions of ‘control’ and ‘subsidiary’ are central to determining the entities to be consolidated and the nature of the group As we know, paragraph 12 of AASB 127 requires that: the consolidated financial statement shall include all subsidiaries of the parent The definition of a subsidiary directly relies upon the concept of ‘control’. A subsidiary is defined at paragraph 4 of AASB 127 as: an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent) Requirement to consolidate based upon existence of control, which is: the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities (AASB 127, par. 4)

18. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-18 Concept of control (cont.) Note –The capacity to control both the financial and operating policies must exist prior to establishing the existence of control –Substance-over-form considerations are required to be used in determining the existence of control, a process that calls for the exercise of professional judgment Factors that might indicate the existence of control (AASB 127, par. 13) –Control is assumed to exist when the parent entity owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control

19. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-19 Concept of control (cont.) Factors that might indicate the existence of control (AASB 127, par. 13) (cont.) Control also exists when the parent owns half or less of the voting power of an entity when there is: (a)power over more than half of the voting rights by virtue of an agreement with other investors (b) power to govern the financial and operating policies of the entity under a statute or an agreement (c) power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body, or (d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body

20. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-20 Concept of control (cont.) Subsequent loss of control (AASB 127, par. 32) A parent can lose control of a subsidiary with or without a change in absolute or relative ownership levels. This could occur, for example, when a subsidiary becomes subject to the control of a government, court, administrator or regulator. It also could occur as a result of a contractual agreement

21. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-21 Concept of control (cont.) Existence of potential voting rights These are instruments which have the potential, if exercised or converted, to give the entity voting power –Would include share options, convertible notes In considering ‘capacity to control’ we must consider potential voting rights Paragraph 14 of AASB 127 states: The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another entity, are considered when assessing whether an entity has the power to govern the financial and operating policies of another entity

22. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-22 Concept of control (cont.) As already indicated, ‘control’ is defined as: the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities Hence, must govern another entity in a way that provides benefits to the parent entity Parties such as receivers and managers would not be required to consolidate the entities over which they have control in their capacity as receiver or manager as they are governing for the benefit of others

23. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-23 Concept of control (cont.) Summary Subsidiaries are considered to be entities that are under the control of a parent entity—theoretically, control can exist in the absence of any equity- ownership interest Holding of an ownership interest usually entitles the investor to an equivalent percentage interest in the voting rights of the investee, and consequently a majority ownership interest would normally, though not necessarily, be accompanied by the existence of control

24. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-24 Concept of control (cont.) Summary (cont.) Note Control can be passive—it might be possible to exert control over another entity, even though the option to exert such control might never have been exercised—the power to govern is sufficient to require consolidation Adoption of criteria of control for defining economic entity will enable a complete economic entity to be reflected in consolidated financial statements even though, for example, some of the subsidiaries might be in the form of partnerships or trusts

25. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-25 Direct and indirect control Consider the following diagram and consider: –Does Entity A control Entity C? –Which control would be considered to be direct and which control would be considered to be indirect? –What does the non-controlling interest represent? –We need to remember that the ‘economic entity’ comprises the parent entity and all of its subsidiaries, regardless of whether the subsidiary is directly controlled by the parent entity, or indirectly controlled by virtue of an indirect equity interest

26. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-26

27. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-27 Accounting for business combinations According to AASB 3, a ‘business combination’ is defined as: A transaction or other event in which an acquirer obtains control of one or more businesses If the assets acquired do not fit the description of business considered above, the transaction shall represent the acquisition of a group of assets and the appropriate accounting treatment would be covered by AASB 116 Property, Plant and Equipment, rather than AASB 3 Business Combinations

28. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-28 Accounting for the consolidation of separate legal entities Goodwill defined (AASB 3 Business Combinations) Future economic benefits arising from assets that are not capable of being individually identified and separately recognised AASB 3 requires the following: The acquirer shall, at the acquisition date: (a)recognise goodwill acquired in a business combination as an asset, and (b)initially measure that goodwill at its cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised

29. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-29 Accounting for the consolidation of separate legal entities (cont.) AASB 3 notes that there are four steps to be considered when accounting for business combinations, these being: 1 identifying the acquirer 2 determining the acquisition date 3 recognising and measuring the identifiable assets acquired, the liabilities assumed and any non- controlling interest in the acquiree, and 4 recognising and measuring goodwill or a gain from a bargain purchase

30. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-30 Identifying the acquirer For each business combination, AASB 3 requires one of the combining entities to be identified as the acquirer. An acquirer might obtain control of an acquiree in a variety of ways. These include: transferring cash, cash equivalents or other assets (including net assets that constitute a business) incurring liabilities issuing equity interests providing more than one type of consideration, or without transferring consideration, including by contract alone

31. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-31 Determining the acquisition date Paragraph 8 of AASB 3 identifies the acquisition date as the date on which the acquirer obtains control of the acquiree

32. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-32 Recognising and measuring the identifiable assets acquired and the liabilities assumed At the acquisition date, the acquirer is required to recognise: – goodwill separately from the identifiable assets acquired –the liabilities assumed, and –any non-controlling interest in the acquiree By applying the recognition principles contained in AASB 3 it is possible for the acquirer to recognise assets and liabilities that the acquiree had not previously recognised in its own financial statements Examples of assets that may be recognised by the acquirer, but not previously by the acquiree, would include acquired identifiable intangible assets, such as a brand name or a patent These assets may not have been recognised by the acquiree in its financial statements because it developed them internally and expensed the related costs in the period in which they were incurred, in compliance with AASB 138

33. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-33 Recognising and measuring the identifiable assets acquired and the liabilities assumed (cont.) The general rule for measuring the identifiable assets acquired and the liabilities assumed is provided by AASB 3. Under paragraph 18, the acquirer measures each identifiable asset acquired (including identifiable intangible assets) and liability assumed, at their acquisition-date fair values ‘Fair value’ is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Specifically, paragraph 18 states: The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values

34. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-34 Recognising and measuring goodwill Goodwill is defined in AASB 3 Business Combinations as: An asset representing future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognised. Goodwill is individually identified and separately recognised

35. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-35 Recognising and measuring goodwill (cont.) In the context of business combinations, AASB 3, par. 32, requires that: The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) below: (a) the aggregate of: (i) the consideration transferred measured in accordance with this IFRS, which generally requires acquisition-date fair value (ii) the amount of any non-controlling interest in the acquiree measured in accordance with this IFRS, and (iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this IFRS

36. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-36 Recognising and measuring goodwill (cont.) This rule on the previous slide can be simplified as follows: FAIR VALUE OF CONSIDERATION TRANSFERRED XXX plus Amount of non-controlling interest XXX plus Fair value of any previously held equity interest in the acquiree XXX XXX less Fair value of identifiable assets acquired and liabilities assumed XXX GOODWILL ON ACQUISITION DATE XXX Calculated in the manner shown above, the net figure for goodwill will be a positive number. If the number is negative, then rather than it being considered as goodwill, the amount would be considered as a gain on bargain purchase

37. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-37 Consideration transferred In a business combination the consideration transferred is measured at fair value. AASB 3 states that the fair value of consideration transferred is calculated as: the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by the acquirer

38. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-38 Worked Example 28.2—Calculation of goodwill on acquisition On 1 July 2012, Ying Ltd acquired for cash all the issued share capital of Yang Ltd for an amount of $650 000. On the date of the acquisition, the assets, liabilities and contingent liabilities of Yang Ltd are as follows: Carrying amount ($)Fair value ($) Cash 15 000 15 000 Accounts receivable 68 000 68 000 Inventory 112 000 131 000 Land 360 000 420 000 Plant 220 000 240 000 Loans payable (170 000) (170 000) Accounts payable (58 000) (58 000) Contingent liabilities – (46 000)

39. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-39 Worked Example 28.2—Solution Fair value of consideration transferred $650 000 less Fair value of identifiable assets acquired and liabilities assumed Cash 15 000 Accounts receivable 68 000 Inventory 131 000 Land 420 000 Plant 240 000 Loans payable (170 000) Accounts payable (58 000) Contingent liabilities (46 000) Total fair value of net assets acquired $600 000 Goodwill on acquisition date $50 000

40. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-40 Recognising and measuring goodwill (cont.) Consistent with the requirements of paragraph 48 of AASB 138 Intangible Assets that internally generated goodwill not be recognised as an asset, no goodwill would be brought to account by Yang Ltd (the acquiree) in Worked Example 28.2 as only purchased goodwill, and not internally generated goodwill, is recognised for accounting purposes The purchased goodwill will be brought to account by Ying Ltd as part of the consolidation process and will appear in the consolidated financial statements

41. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-41 Further simple goodwill calculation Let us assume that Entity A acquired Entity B, and that: Entity A provided the following consideration –cash $2 million –land (cost: 1 million; fair value: $1.5 million) –there were also associated legal fees of $50 000 The assets and liabilities of Entity B at the date of acquisition were: –property, plant and equipment: carrying value $1.8 million; fair value $2 million –land: Cost $700 000; fair value $800 000 –liabilities: $300 000 What was the amount of purchased goodwill?

42. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-42 Accounting for the consolidation of separate legal entities (cont.) Determination of goodwill (cont.) Prior to 2005, goodwill acquired also had to be amortised systematically over the periods in which the benefits were expected to be provided (maximum of 20 years) Goodwill amortisation now prohibited and goodwill is now required to be subject to impairment testing

43. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-43 Accounting for the consolidation of separate legal entities (cont.) Goodwill impairment testing After initial recognition, the acquirer is to measure goodwill acquired in a business combination at cost less any accumulated impairment losses Goodwill acquired in a business combination is not to be amortised. Instead, the acquirer is to test it for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, in accordance with AASB 136 Impairment of Assets

44. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-44 Accounting for the consolidation of separate legal entities (cont.) Goodwill impairment testing (cont.) AASB 136 Impairment of Assets (par. 60) states: An impairment loss shall be recognised immediately in the profit and loss, unless the asset is carried at revalued amount in accordance with another Standard (e.g. in accordance with the revaluation model in AASB 116). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard. Note As goodwill cannot be revalued, an impairment loss pertaining to goodwill is to be recognised in the profit and loss AASB 136 (pars 80–99) offer additional guidance in relation to impairment testing of goodwill

45. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-45 Accounting for the consolidation of separate legal entities (cont.) First step in consolidation process Substitute the assets and liabilities of the subsidiary for the investment account, which currently exists in the parent company Where the net assets do not equal the value of the investment, this will lead to a difference on consolidation, i.e. the goodwill acquired

46. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-46 Accounting for the consolidation of separate legal entities (cont.) Elimination of pre-acquisition shareholders’ equity The investment account in the subsidiary will be eliminated in full against the pre-acquisition shareholders’ funds of the subsidiary This will avoid the double counting of assets, liabilities and shareholders’ funds of the subsidiary Procedural details contained in AASB 127, pars 18–21 Refer to Worked Example 28.3—A simple consolidation—on pp. 871–4 –Consolidation worksheet used to facilitate consolidation process

47. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-47 Worked Example 28.3—A simple consolidation Parent Ltd acquires all the issued capital of Subsidiary Ltd for a cash payment of $500 000 on 30 June 2012. The statements of financial position of both entities immediately following the purchase are: Parent Ltd Subsidiary Ltd ($000) Current assets Cash 10 5 Accounts receivable 150 55 Non-current assets Plant 800 500 Land 200 100 Investment in Subsidiary Ltd 500 – 1 660 660 Current liabilities Accounts payable 60 30 Non-current liabilities Loans 400 150 Shareholders’ equity Share capital 1 000 200 Retained earnings 200 280 1 660 660

48. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-48 Worked Example 28.3—A simple consolidation (cont.) If we assume that the assets in Subsidiary Ltd are fairly valued, and there are no contingent liabilities to consider, then goodwill acquired by Parent Ltd would be determined as: Fair value of purchase consideration $500 000 Less: Fair value of identifiable assets acquired and liabilities assumed $480 000 Goodwill on acquisition $20 000

49. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-49 Worked Example 28.3—Elimination entry The consolidation entry to eliminate the investment in Subsidiary Ltd would be: Dr Share capital 200 000 Dr Retained earnings 280 000 Dr Goodwill 20 000 Cr Investment in Subsidiary Ltd 500 000 ( to eliminate the investment in Subsidiary Ltd and to recognise the goodwill on acquisition ) The above entry would be posted to the consolidation worksheet and the final column of the worksheet would provide the information to present the consolidated statement of financial position The above entry is not made in the journal of either Parent Ltd or Subsidiary Ltd but rather in a separate consolidation journal, which is then posted to the consolidation worksheet

50. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-50 Consolidation worksheet Eliminations and adjustments Consolidated Parent Ltd Subsidiary Ltd Dr Cr statement ($000) ($000) ($000) ($000) ($000) Current assets Cash 10 5 15 Accounts receivable 150 55 205 Non-current assets Plant 800 500 1 300 Land 200 100 300 Investment in Subsidiary Ltd 500 – 500 – Goodwill on acquisition – – 20 20 1 660 660 1 840 Current liabilities Accounts payable 60 30 90 Non-current liabilities Loans 400 150 550 Shareholders’ equity Share capital 1 000 200 200 1 000 Retained earnings 200 280 280 200 1 660 660 500 500 1 840

51. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-51 Accounting for the consolidation of separate legal entities (cont.) So, a typical consolidation journal entry to eliminate investment in subsidiary would be recorded in a consolidation journal and posted to a consolidation worksheet Journal entry DrShare capital DrRetained earnings DrGoodwill CrInvestment in Subsidiary Ltd

52. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-52 Recognition of gain on bargain purchase Formerly referred to as a ‘discount on acquisition’ Possible (though not common) for a company to gain control of an entity for an amount less than the fair value of the proportional share of the net assets acquired (acquired at a discount)

53. . Recognition of gain on bargain purchase (cont.) Where an entity is acquired at a discount AASB 3 (par. 36) requires the following: –If the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised exceeds the cost of the business combination, the acquirer shall: (a)reassess the identification and measurement of the acquiree’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination, and (b)recognise immediately in profit and loss any excess remaining after that reassessment Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-53

54. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-54 Recognition of gain on bargain purchase (cont.) Pursuant to AASB 127 we are to treat the gain on bargain purchase as part of profit or loss Eliminate investment in subsidiary acquired at discount Journal entry to eliminate DrShare capital DrRetained earnings CrGain on bargain purchase CrInvestment in Subsidiary Ltd Refer to Worked Example 28.4 on pp. 875–6—Acquisition of subsidiary at a discount

55. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-55 Subsidiary’s assets not recorded at fair values If subsidiary’s assets not recorded at fair value then adjustments will be required so that a reliable figure for goodwill (or ‘gain on bargain purchase’) can be calculated AASB 3 stipulates either: –revalue the identifiable assets in the accounting records of the subsidiary before consolidation—all the non-current assets of the subsidiary are revalued to their fair values in the accounting records of the subsidiary, or –recognise the necessary adjustments on consolidation. We would first recognise a revaluation of the non-current assets in the consolidation worksheet (Dr Asset; Cr Revaluation surplus), and then we would eliminate the investment in the subsidiary against the pre-acquisition shareholders’ funds of the subsidiary (which would include the amount recognised on revaluation)

56. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-56 Subsidiary’s assets not recorded at fair values (cont.) Adjustment on consolidation to revalue Non-current assets CrRevaluation surplus –assets to fair value DrAsset –to eliminate the investment in the subsidiary, as well as the revaluation reserve created in the previous entry DrShare capital DrRetained earnings DrRevaluation surplus DrGoodwill CrInvestment in subsidiary See Worked Examples 28.5 and 28.6 (pp. 877 & 878)

57. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-57 Consolidation after the date of acquisition Pre-acquisition shareholders’ funds of the subsidiary are eliminated on consolidation Typically provides for goodwill on consolidation In period following acquisition, subsidiary will generate profits or losses—to the extent that these results have been generated in the period after acquisition, they should be reflected in the results of the economic entity and be included within the consolidated equity

58. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-58 Consolidation after the date of acquisition (cont.) Result Post-acquisition earnings (unlike pre-acquisition earnings) are considered to be part of the earnings of the economic entity Refer to Worked Example 28.7 on pp. 861–3—Consolidation in a period subsequent to the acquisition of the subsidiary

59. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-59 Summary Consolidated financial statements –Present aggregated information about the financial performance and financial positions of various separate legal entities –Provide a single set of financial statements that represent the financial position and performance of the group as if it were operating as a single economic entity ‘Control’ is the determining factor in deciding which organisations should be included in the consolidation process. We MUST clearly understand what ‘control’ means All controlled entities to be included in the consolidation process regardless of legal form and field of activities Investment in subsidiary must be offset on consolidation against the pre-acquisition capital and reserves of the subsidiary

60. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-60 Summary (cont.) An adjustment may be required to reflect the fair value of the subsidiary’s assets as at the date of acquisition, and any difference will be either goodwill or gain on bargain purchase If balance represents goodwill, goodwill must be periodically reviewed for any impairment losses in accordance with AASB 136 Impairment of Assets If a discount arises on consolidation, the discount is to be treated as a gain on bargain purchase (part of income) in the consolidated financial statements Following consolidation, the consolidated retained earnings balance represents the parent entity’s retained earnings plus the economic entity’s share of the post-acquisition earnings of the controlled entities (subsidiaries)

61. . Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 28-61 Summary (cont.) The balance in the various consolidated reserve accounts will represent the balance of the parent entity’s reserve accounts plus the parent entity’s share of the post- acquisition movements of the subsidiaries’ reserve accounts Consolidation entries are to be performed in a separate consolidation worksheet/journal and NOT in the accounts of the separate legal entities