Intro: this Study Guide explains the objectives of consolidated FS.

The effect this relationship has between a parent & subsidiary, on the subsidiarys entity statements & the consolidated FS. Why it is necessary to use FV for the consideration of an investment in a subsidiary, together with the fair values of a subsidiarys identifiable assets & liabilities when preparing consolidated FS. And how to describe and apply the required accounting treatment of consolidated goodwill. The objective of consolidated financial statements
Objectives of consolidated FS

Determine financial status of group as if 1 single entity

Safeguard interests of ordinary shareholders of parent Co

Show full earnings on parents investment

Help prevent malpractices & manipulation

Concept of Consolidated Financial Statements

D2.1

Business Combinations
Related party relationship between parent & subsidiary

D2.2

Related party: A party is related to an entity if directly or indirectly through one or more intermediaries, the party:

1. controls, is controlled by, or is under common control with, entity (also includes fellow subsidiaries) 2. has an interest in the entity that gives it significant influence over the entity or 3. has joint control over the entity

Effect of related party relationship between a parent & subsidiary on FS of subsidiary

If parent & subsidiary are related parties

they have to make related party disclosures while preparing their individual FS

A related party transaction is a transfer of resources, services or obligations between related parties, regardless of whether a price is charged. Related party transactions not present Related party transactions are present Still disclose status of the group companies

Related party disclosures requirement of IAS 24

Please: Refer to the next page

If related party transaction are present an entity shall disclose

nature of the related party relationship

amount of the transactions

amount of outstanding balances

provision made for doubtful debts from amounts due from related parties

compensation paid to key management personnel

Necessity to use fair values for investment in a subsidiary

FV have to be used while determining cost of control because acquirer

has no interest in historical cost

will pay the potential market price rather than price paid long time ago to acquire assets / liabilities

will be interested in FV which are rational & unbiased estimates of potential market price of asset

CFS are prepared from the acquirers perspective. The acquirer is concerned with the current prices in the economy. So FV are used while preparing CFS.

Current prices in the economy

Are reflected while recording transactions at FV

Are not reflected while recording transactions at Historical cost

Concept of Consolidated Financial Statements

D2.3

Business Combinations
Accounting treatment of consolidated goodwill (GW)
Consideration +NCI

D2.4
Intangible asset reflected in consolidated SOFP

Goodwill = Consideration Net assets Positive GW

> >

Net assets

Net assets

=
Consideration+ NCI

Gain on bargain purchase

Included in other income in consolidated SOCI

$ $ X X X

IFRS 3 requirements for goodwill Recognise GW acquired in a business combination as an asset Initially, measure GW at its cost. After initial recognition, measure GW at cost less any accumulated impairment losses GW acquired in a business combination shall not be amortised GW tested for impairment annually or more frequently if required

Pro forma - Goodwill on purchase of shares in Consideration Add : Value of NCI Add: Fair value of the acquirers previously held equity interest in the acquiree on the acquisition date Less: net assets represented by Equity shares Share premium Fair value adjustments All other pre-acquisition reserves Goodwill on purchase of shares in Less: Impairment loss (if any) To consolidated SOFP

X
X X X X

(X) X (X) X

(+) consideration transferred Measurement of goodwill in consolidated FS at acquisition date (+)amount of any non- controlling interest (-) net identifiable assets acquired Goodwill or bargain purchase is calculated as the difference between: A Fair value of the consideration on the acquisition date + Amount of non-controlling interest in the acquiree + Fair value of the acquirers previously held equity interest in the acquiree on the acquisition date B Fair values of the identifiable assets acquired and liabilities assumed on the acquisition date Goodwill = A B (if A > B) Bargain purchase = B A ( if B > A)

net identifiable assets acquired

Requirement of IFRS for recognition at acquisition date (AD) non -controlling interest in acquiree acquirers previously held equity interest in acquiree (for business combination achieved in stages) Consideration transferred

Concept of Consolidated Financial Statements

D2.5

Business Combinations

D2.6

Measurement of Non Controlling Interest (NCI) IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure NCI either at: fair value (sometimes called the full goodwill method); or the NCI's proportionate share of net assets of the acquiree (partial goodwill method) (option is available on each business combination) Measurement period Transaction cost Shall not exceed one year from AD

Factors affecting goodwill

Recognised as expenses When acquirer commits payment of part consideration to acquiree after AD on fulfilment of a certain specified event or condition in the future

Contingent consideration

Subsequent measurement of contingent consideration

Does not affect goodwill