Financial Accounting - Consolidation

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EBC4074 Financial Accounting Consolidation

Wholly owned subsidiaries & Intragroup transactions
Seminar 1 - Réka Felleg

School of Business and Economics
Sharing Success

Agenda

• • • •

Key steps Problem 22.4 Break (?) Problem 23.3

Seminar 1 - Wholly owned subsidiaries & Intragroup transactions

Slide 2

Key steps
• Acquisition analysis – Identify an/the acquirer – Determine the acquisition date – Recognize and measure FV of identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree – Measure FV of consideration transferred – Recognize and measure goodwill or a gain from bargain purchase Consolidation process – Add up the financial statements of the parent and subsidiaries – Make adjustments for: • Business combination valuation entries – required to adjust the carrying amounts of the subsidiary’s identifiable assets and liabilities to fair value and recognize goodwill • Pre-acquisitions entries – required to eliminate the carrying amount of the parent’s investment in each subsidiary against the pre-acquisition equity of that subsidiary • Intragroup transactions – eliminate transactions between entities within the group subsequent to acquisition date Seminar 1 - Wholly owned subsidiaries & Intragroup transactions Slide 3



Problem 22.4:


Consolidation Worksheet, Unrecognized Intangibles and Liabilities

Lyngen Ltd gained control of Rila Ltd by acquiring all its shares on 1 July 2010. The equity that date was: Share capital $100 000 Retained earnings $ 35 000



At 1 July 2010, all the identifiable assets and liabilities of Rila Ltd were recorded at fair value CA FV except for: $ Inventory Land Plant (cost $120 000) 18 000 120 000 95 000 22 000 130 000 98 000

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• • • • •

The inventory was all sold by 30 June 2011. The plant had a further 5-year life but was sold on 1 January 2013 for $50 000. The land was sold in March 2011 for $150 000. BCVR amounts of sold or fully consumed revalued assets are transferred to retained earnings. At 1 July 2010, Rila Ltd had guaranteed a loan taken out by Sierra Ltd. Rila Ltd had not raised a liability in relation to the guarantee, but as Sierra Ltd was not performing well, Lyngen Ltd valued the contingent liability at $5 000. In January 2013, Sierra Ltd repaid the loan. Rila Ltd had also invented a special tool and patented the process. No asset was raised by Rila Ltd, but Lyngen Ltd valued the patent at $6 000, with an expected useful life of 6 years. The tax rate is 30%. See Financial Statements as at 30 June 2013 in textbook (p892). The transfer to general reserve during the year ended 30 June 2013 was from profits earned before 1 July 2010. Required: Prepare the consolidation adjustment journal entries, consolidation worksheet and the consolidated financial statements as at 30 June 2013. (Only entries at 30 June 2013 are required.) Seminar 1 - Wholly owned subsidiaries & Intragroup transactions Slide 4

Acquisition analysis

Business combination valuation reserve (BCVR)

Shares in Rila Ltd

IFRS 3.32

Goodwill is the excess of the consideration transferred over the net fair value of the identifiable assets acquired and liabilities assumed. Seminar 1 - Wholly owned subsidiaries & Intragroup transactions Slide 5

Business Combination Valuation entries at 30 June 2013

Plant at Cost

Carrying Amount

120 000 less 95 000 120 000 less 98 000 3 000 x 0.3 3 000 x 0.7

Seminar 1 - Wholly owned subsidiaries & Intragroup transactions

Slide 6

BCV entries at 30 June 2013

(3 000 / 5) / 2 Effect of 2 years of depreciation

Total depreciation from 1 July 2010 to 1 Jan 2013: (3 000 / 5 ) x 2 + (3 000 / 5 ) / 2

Seminar 1 - Wholly owned subsidiaries & Intragroup transactions

Slide 7

BCV entries at 30 June 2013

Progressive reversal of DTL of 900 recognized at acquisition date in proportion of depreciation charges 1 500 x 0.3 300 x 0.3

1 200 x 0.3

Seminar 1 -...
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