ACC302 Cheat Sheet WIP (SU6) PDF

Preview

Summary

ACC302: ADVANCED FINANCIAL ACCOUNTING SU1: CONSOLIDATION AT THE DATE OF ACQUISITION Chapter 1: Introduction to Consolidated Financial Statements What is Consolidated Financial Statements and who has to present them? When individual reporting entities are put under common control (known as a “group”)...

Description

ACC302: ADVANCED FINANCIAL ACCOUNTING SU1: CONSOLIDATION AT THE DATE OF ACQUISITION Chapter 1: Introduction to Consolidated Financial Statements What is Consolidated Financial Statements and who has to present them? When individual reporting entities are put under common control (known as a “group”), an additional set of financial statements (“CFS”) will have to be prepared and presented, on top of the individual financial statements. FRS110 (Consolidated Financial Statements) requires a parent to prepare and present CFS for the group. Chapter 2: Combination of Accounts Why is investment account eliminated? (Page 27) It is necessary to eliminate the cost of investment against the shareholders’ equity (e.g. Share Capital, Retained Profits, Revaluation Reserve @ acquisition date) of the subsidiary, because at the date of acquisition, the cost of investment is equal to the net assets of the subsidiary acquired, and the net assets of the subsidiary is represented by its shareholders’ equity (A – L = SE). This elimination is to avoid double-counting when all the assets and liabilities of the parent and subsidiary are added together. Chapter 3: Purchase Price Acquisition (“PPA” or “Fair Value Adjustments”) 3.1. To fair value all the identifiable assets and liabilities of subsidiary acquired (Page 29)  Assets and Liabilities in the Subsidiary’s BS to be recognised at their respective acquisition-date fair value in the CBS - Take note of the policy used by subsidiary to carry the cost of assets: “Cost” or “Revaluation” 3.2. To recognise all the identifiable assets and liabilities of subsidiary acquired  Very stringent recognition rules for intangible assets and contingent liabilities in individual FS (Page 34)  Required to be recognised in CBS, even if they are recognised in individual financial statements (a) Intangible assets: brand, copyright, customer lists, and in-process research and development projects - Note: “Assembled Workforce” is not a identifiable asset: Should not be recognised in individual FS or CFS (b) Contingent liabilities: Potential losses arising from lawsuits Chapter 4: Goodwill on Consolidation Goodwill = Cost of Investment - Acquisition Date Fair Value of Identifiable Net Assets of Subsidiary  Note: “Cost of investment” may include “NCI” + parent’s “Cost of Investment”  Calculation of goodwill is affected by the method to measure NCI 4.1. Positive Goodwill: “Goodwill on Consolidation”  An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised  The parent may be willing to pay a premium for the benefits arising from the business combination, or for the earning potential of the subsidiary  Subjected to impairment, but not amortisation 4.2. Negative Goodwill: “Gain on Bargain Purchase”  The parent may have acquired the subsidiary at a bargain (Cost of investment < Net assets of Subsidiary)  The difference will be recognised on the P/L as “Gain on Bargain Purchase” (revenue) Chapter 5: Non-Controlling Interests Non-Controlling Interests represents the portion of the equity in the subsidiary not attributable to the parent  Arises when the parent does not own 100% of the share capital of the Subsidiary 5.1. Full Consolidation (Page 52) If a parent does not acquire 100% of the subsidiary’s share capital, it does not own 100% of the subsidiary’s net assets, as the balance belongs to the shareholders of the NCI. However, as the parent has control over the subsidiary, the former also owns the rights and obligations to the latter’s assets and liabilities. As such, in accordance with the definition of “asset” in the FRS, and the “full consolidation principle”, 100% of the subsidiary’s assets/liabilities are added to those of the parent in the CBS. Correspondingly, the balance of the subsidiary’s net assets that is attributable to the NCI, is represented in the CBS as the “Non-Controlling Interests”. 5.2. Measurement Methods (Page 54) NCI can be measured, on a case by case basis, based on: (a) ADFV: Acquisition-Date Fair Value of Subsidiary (b) FVINA: Share of the Acquisition-Date Fair Value of the Identifiable Net Assets ADFV FVINA  % NCI Shareholding x Net Assets of Subsidiary  Share Price x No. of Shares held by NCI Note: Net Assets can be (A-L), or Shareholders Equity amt  “NCI portion of goodwill” can arise Note: May have a negative goodwill for “NCI portion”, and  Goodwill is all attributable to parent positive goodwill for parent: Amount should not be offset - No “NCI portion of goodwill” 1|Page

SU2: CONSOLIDATION SUBSEQUENT TO THE DATE OF ACQUISITION Chapter 1: Consolidated Statement of Profit or Loss and Other Comprehensive Income (CPL) Full Consolidation Basis  Same preparation basis as CBS  Add across like items of revenue and expenses of subsidiary to those of parent - to arrive at the group revenue and expenses in the CPL - On 100% basis regardless of parent’s equity interest in the subsidiary  Where parent holds less than 100% equity interest in the subsidiary, - the subsidiary’s profit attributable to the other shareholders is presented as “profits attributable to NCI” in the CPL - income apportioned to NCI based on the NCI % equity interest of the subsidiary Chapter 2: Pre-Acquisition and Post-Acquisition Reserve (Page 79) The subsidiary’s reserves have to be distinguished between pre-acquisition reserves, and post-acquisition reserves.  e.g. retained profits, revaluation reserves, fair value reserves 2.1. Pre-Acquisition Reserve  Represent part of the net assets of the subsidiary @ date of acquisition  Have to be eliminated against the investment in subsidiary account (SU1) - Permanent entry: CJE to eliminate the pre-acquisition reserve will be the same at every subsequent period 2.2. Post-Acquisition Reserve  Treated as part of group reserves  Have to be included inside the consolidated FS (do NOT eliminate) Chapter 3: Intragroup Transactions 3.1. Intragroup Account Balances (Page 84) When a parent enters into a transaction with its subsidiary (or vice versa), it will record the transaction in its books, like any other transaction entered with other entities outside the group. However, in consolidation, when the parent and the subsidiary are deemed to be a single entity, it would not make sense to report in the consolidated FS that the group sells goods to itself or buys goods from itself.  In consolidation, these intragroup accounts have to be eliminated, and in full.  No net impact to profit and net assets of group  E.g. Intragroup loans, Intragroup sales Dr Sales AA AA = Total amount of intragroup sales during the year Cr COGS AA  Most likely expressly stated in the question)  Follow up with the 3.2.1 entry if there are unrealised profits (To eliminate intragroup sales) 3.2. Unrealised Intragroup Profit and Loss (Page 91) 3.2.1. Intragroup sale of goods (Page 103)  Eliminate unrealised profits, in full (no need to apportion) - Upstream (S sells to P): Affects profit attributable to NCI - Downstream (P sells to S): Does not affect profit attributable to NCI Dr COGS BB BB = Unrealised profits during the year Cr Inventory BB  If unrealised profit given: Use the given figure  If unrealised sale given: Find the unrealised profit (To eliminate unrealised intragroup profit) 3.2.2. Intragroup sale of depreciable assets (Page 109)  Eliminate unrealised gain (if asset is still in P or S books), in full  Depreciation: Gradual realisation of unrealised gain Dr Gain on disposal X  Remember to do the depreciation CJE Dr PPE X CC = Difference of: Cr Accumulated Depreciation X - Original depreciation expense per year (To eliminate unrealised intragroup profit) - New depreciation expense per year *This entry is for the year where the intragroup disposal took Dr Accumulated Depreciation CC place, remember the CJEs for the subsequent periods Cr Depreciation Expense CC (To record gradual realisation of unrealised profit) Practice: SU2 - Q7, Q8, Textbook page 167 – 192 3.3. Intercompany Dividends (Page 135)  Eliminate intercompany dividends: paid by S, to P and to NCI Dr Dividend Income (P) DD  Dividend Appropriation is part of Retained Profits of S Cr Dividend Appropriation – RP (S) DD DD = Check PL of parent for this amount (To eliminate intercompany dividend) EE = Pro-rate from DD based on NCI% Dr Non-Controlling Interest (CBS) EE The total dividends (DD + EE) paid by S, can be found in the Cr Dividend Appropriation – RP (S) EE 2|Page

(To eliminate NCI in dividend) Statement of Changes in Equity, or passage (if no SCE given) Chapter 4: Other Consolidation Adjustments 4.1. Impairment of Goodwill  Goodwill on Consolidation is subjected to impairment tests - Done on a cash-generating unit (CGU) basis (Page 146) - Not based on the subsidiary as a whole  Dr Impairment Expense X Cr Goodwill on Consolidation X 4.2. Realisation of Fair Value Adjustments (Page 157) When a subsidiary is acquired, PPA is performed to record the subsidiary’s assets and liabilities at fair value (SU1). In subsequent periods, when the fair valued assets and liabilities are sold and settled, a CJE will have to be made because:  The sale/settlement of the asset/liability recognised in the subsidiary books will not be the same @ group level  E.g. subsidiary recorded a gain on disposal of $100 (NBV@cost: $50), but @ group it should be $10 (NBV@FV: $140) - Pass CJE to “correct” the profit recognised @ group level !!CJE Format for Subsidiary: 1. Elimination of Investment Account (1 CJE):  Parent’s portion of Subsidiary’s “Pre-Acquisition Reserve”  Parent’s portion of Subsidiary’s “Share Capital”  Parent’s portion of PPA (SU1) – Fair Value Changes of Assets/Liabilities + Unrecognised Assets/Liabilities  Goodwill 2. CJEs based on Passage in Question  3.1. Intragroup account balances (loans, sales)  3.2.1. Intragroup unrealised profit  3.2.2. Intragroup sale of depreciable assets Note: Prior year events may also require CJE (e.g. unrealised profits from PY) 3. 3.3. Intercompany Dividends 4. Attribution of Profits/OCI to NCI  NCI’s Share of Profit = “NCI %SH” x “S Profit (less any Upstream Unrealised Profits)”  NCI’s Share of OCI = “NCI %SH” x “S OCI (usually no adjustments)” Dr Non-Controlling Interests – Profit (CPL) DR Non-Controlling Interests – OCI (CPL) Cr Non-Controlling Interests (CBS) Cr Non-Controlling Interests (CBS) (Being profit attributable to NCI) (Being OCI (e.g. revaluation surplus) attributable to NCI) 5. NCI’s Portion of Equity  NCI’s portion of Subsidiary’s “Beginning Reserves (e.g. RP, RR)” = “NCI’s %SH of S” x “S Beginning RP (or RR)” (Note: CJEs for adjustments in passage may affect “Beginning RP” – e.g. unrealised profits from prior years)  NCI’s portion of Share Capital  NCI’s portion of PPA !!Consolidation Worksheet Step-by-Step (Subsidiary) 1. CJE  Pass all the adjustment from the CJE to the respective accounts 2. Adjustments from P/L or OCI to “RP” and Reserves  All P/L adjustments should be passed to “Retained Profits” as well - E.g. P/L (before Profit after Tax in the CPL) has a net adjustment of +$40 - The “Retained Profit” needs to +$40 as well  Similarly, all OCI adjustments should be passed to the reserves (e.g. “Revaluation Reserve”, “Translation Reserve”) 3. Profit/OCI Attributable to NCI removed from “RP” and Reserves  All P/L attributable to NCI (from CPL), should be removed from RP - This portion of the profit belongs to the NCI  All OCI attributable to NCI, should be removed from reserves (e.g. “Revaluation Reserve”, “Translation Reserve”) Note:

3|Page

For Subsidiaries, CJE is passed to remove portions of the Subsidiary’s Asset/Liabilities and Revenues/Expenses that are attributable to NCI. For Associates, CJE is passed to recognise portion of the associate’s Assets/Liabilities and Revenues/Expenses, as part of the group.

4|Page

SU3: INVESTMENT IN ASSOCIATES AND JOINT VENTURES Chapter 1: Investment in Associates 1.1.Equity Method (Page 374)  Single line item - “Investment in associate”: Parent’s proportionate share of the associate’s net assets presented in the CBS - “Share of profit of associate”: Parent’s share of the associate’s profit or loss presented in the CPL  FS of the associate are not added, line by line, to the FS of other entities in the group (unlike full consolidation) (i) Dr Dividend AA AA = Dividend Income in P’s books (check Parent’s PL)  Dividends received from A should not be treated as Cr Investment in Associate AA To convert from cost to equity for dividends from associate income (ii) Dr Investment in Associate BB BB = P’s % shareholding of A x A’s Profits Cr Share of Profit of Associate BB  NO need to eliminate ‘investment in associate’. To equity account for parent’s share of associate’s profit *Treat this account as how much A earned for P (iii) Dr Investment in Associate CC CC = P’s % shareholding of A x A’s OCI (Revaluation surplus) Cr Share of Reval Surplus of Associate CC To equity account for parent’s share of A’s reval surplus 1.2.Other Adjustments (A) Goodwill (Page 380)  Goodwill may also arise from acquisition of associates (same way of calculating as SU1) - Goodwill = Cost of investment - Share of underlying net assets of A  PPA needs to be considered when calculating the goodwill amount, but: - No need to adjust the fair value of the assets/liabilities - No need to recognise identifiable assets/liabilities (e.g. Brands, Contingent liabilities) Positive Goodwill Negative Goodwill  Embedded in the “investment in associate” account  Written off to P/L E.g. P paid $15 to acquire 20% of A (Net Assets = $100) - No need for “Goodwill” account CJE: Dr Investment in Associate 5 - No CJE required Cr Other Income (Negative Goodwill) 5 (B) Intragroup Transactions (Page 382)  Account balances are not eliminated (contrast to SU2: 3.1)  Unrealised profits are partially eliminated (contrast to SU2: 3.2) - No need to differentiate between upstream/downstream: Same CJE i. Intragroup sale of goods: ii. Intragroup sale of depreciable assets: Dr Share of Profit of Associated Company DD Dr Share of Profit of Associated Company DD Cr Investment in Associated Company DD Cr Investment in Associated Company DD To eliminate unrealised profit (upstream/downstream) To eliminate unrealised profit (upstream/downstream) Dr Investment in Associated Company EE Cr Share of Profit of Associated Company EE Gradual realisation of unrealised profit DD = “P’s % shareholding of A” x “A’s unrealised profit” EE = “Parent’s % shareholding of A” x Difference of: - Original depreciation expense per year - New depreciation expense per year Practice: SU3 Q5, example 6.4 (Page 387) CJEs mostly affect “investment” and “share of A profits” - because it shows how much A owes P (increase or decrease) 1.3.Indirect Associate (Page 415)  Parent owns a subsidiary, which holds an associate  NCI will have a share of the associate’s profit, since it has equity interest in the subsidiary (which owns the associate)  Subsidiary receives Associate’s share of profit, apportioned based on equity method Parent NCI - Share of Profit of Associate = 40% x $100 = $40  Consolidation will be done for P and S, on full consolidation basis (SU1/2) 80% 20% - Share of Profit of Associate (@ CPL) = $40 (100% basis, although only 80% owned)  However, P does not own 100% of S. 20% of Subsidiary’s profit is attributable to NCI Subsidiary - Profit attributable to Shareholders of Parent = $32 - Profit attributable to NCI = $8 40% Accounting treatment for subsidiary and associates remain the same Associate Profit = 100  Subsidiary: Full Consolidation  Associate: Equity Method 5|Page

Chapter 2: Investment in Joint Ventures (Page 421) Conditions to Qualify as Joint Arrangement: a. Contractual Agreement: Sets out terms upon which the parties participates in the arrangement (regardless of SH%) b. Joint Control: Decisions about relevant activities require the unanimous consent of the parties Types of Joint Arrangements 1. Joint Operation: The parties have rights to assets and obligations to liabilities of the joint arrangement 2. Joint Venture: The parties have rights to the net assets of the joint arrangement Joint Operation: (Page 422) Joint Arrangement  Have rights to assets, and obligations to liabilities - can recognise assets/liabilities in separate/consolidated FS Joint Venture: No Separate  Only have rights to net assets of joint arrangement Joint Operation 1 Vehicle?  No rights to assets, and obligations to liabilities - Apply equity method (to be treated same way as an associate) Yes Scenarios (operating as joint arrangement): (Page 430) 1. JO: A Ltd and B Ltd, each borrows $50m and pools the funds to Legal No buy a building for rental Joint Operation 2 Entity 2. JO: C Ltd and D Ltd forms partnership. C Ltd borrows $50m to buy ? the land, while D Ltd borrows $50m to buy building 3. JV: E Ltd and F Ltd incorporates N Ltd. N Ltd borrows $100m to Yes buy land and building 4. JO: X Ltd and Y Ltd incorporates Z Ltd. Z Ltd borrows $100m and Modify 3 Joint Venture Joint Operation 4 buys the land and building, and sells goods back to X Ltd and Y Ltd *Partnership is a separate vehicle, but not a separate legal entity !!CJE Format for Associate: 1. CJEs based on Passage in Question 1.2. Intragroup transactions Note: Prior year events may also require CJE (e.g. unrealised profits from PY) 2. 1.1. Intercompany Dividends 3. 1.1. Share of Associate’s Profit/OCI  Share of Associate’s Profit = “P’s %SH” x “A’s Profit (No need to adjust for up/downstream”  Share or Associate’s OCI = “P’s %SH” x “A’s OCI” 4. Equity Account for Parent’s Share of Associate’s Post-Acquisition Equity (1 JE)  Parent’s share of Associate’s Post-Acquisition “Beginning Reserves (e.g. RP, RR)” = “P’s SH% in A” x “A’s Post-Acquisition Beginning RP (or RR)” (Note: CJEs for adjustments in passage may affect “Beginning RP” – e.g. unrealised profits from prior years) Dr Investment in A Ltd Dr Investment in A Ltd Cr Beginning Retained Profit Cr Beginning Revaluation Reserve (To equity account for post-acquisition BRP of associate) (To equity account for post-acquisition BRR of associate) !!Consolidation Worksheet Step-by-Step (Associate) 1. CJE  Pass all the adjustment from the CJE to the respective accounts 2. Share of Associate’s Profit/OCI  “Share of Associate’s Profit” presented as a line item in CPL (P/L)  “Share of Associate’s OCI” (e.g. Share of A’s Revaluation Surplus), presented as a line item in OCI 3. Share of Associate’s Profit/OCI Added to “RP” and Reserves  The “Share of Associate’s Profit” should be passed to “Retained Profits” as well  Similarly, “Share of Associate’s OCI” should be passed to reserves (e.g. “Revaluation Reserve”, “Translation Reserve”) Note: For Subsidiaries, CJE is passed to remove portions of the Subsidiary’s Asset/Liabilities and Revenues/Expenses that are attributable to NCI. For Associates, CJE is passed to recognise portion of the associate’s Assets/Liabilities and Revenues/Expenses, as part of the group. 6|Page

SU4: FOREIGN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES & FOREIGN CURRENCY TRANSACTIONS Chapter 1: Foreign Subsidiaries, Associates and Joint Ventures  Where the FS of the foreign subsidiaries, associates and joint ventures are presented in a foreign currency, the FS must be translated to the presentation currency of the Parent, before consolidation can be done Practice: Foreign Subsidiary - Page 482-493, Foreign Associate - Page 493-500, Both - Page 509-522, SU4 Q6 1.1.Translation (Note: Foreign Currency TRANSLATION – differentiate from Chapter 2)  Process of converting the presentation currency of the financial statements of a foreign subsidiary, associate or joint venture, to the presentation currency of the parent (A) Exchange Rates Translation Method: Similar method to “Closing Rate” method – based on FRS 21 (Page 468)  All Assets and Liabilities: @ Closing Rate  All items in PL/OCI: @ Transaction Rate (or Average Rate as an approximation)  Translation differences (Gain/Loss) recognised as OCI (No CJE required) (B) Translation Differences (Page 469)  Translation differences arise due to changes in the exchange rate used for net assets, and profit/loss for the year (i) Gain/Loss on Net Assets: “Beginning Ne...