Chapter 18 and 19 - aaaaa PDF

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Chapter 19 1. Explain the purpose of the pre-acquisition entries in the preparation of consolidated financial statements. The purpose of the pre-acquisition entry is to: - prevent double counting of the assets of the economic entity - prevent double counting of the equity of the economic entity - recognise any gain on bargain purchase A simple example such as that below could be used to illustrate these points: A Ltd has acquired all the issued shares of B Ltd. The balance sheets of both companies immediately after acquisition are as follows: Share capital Reserves

$200 100 300

Shares in B Ltd Cash

150 150 300

Share capital Reserves

Cash

$100 50 150 -150 150

The balance of the “Shares in B Ltd” account can be changed to introduce goodwill/ gain on bargain purchase amounts. 3. Is it necessary to distinguish pre-acquisition dividends from post-acquisition dividends? Discuss: -

the definition of acquisition date the meaning of pre-acquisition and post-acquisition equity according to para 38A of AASB 127 an entity shall recognise a dividend from a subsidiary in profit or loss ie as revenue – regardless of whether it is paid from pre- or post-acquisition equity

Question 19.4

Worksheet entries at acquisition date and in subsequent year, no fair value/carrying amount differences at acquisition date, bargain purchase

On 1 July 2016, John Ltd acquired all the issued shares of Robert Ltd for $153 000. At this date the equity of Robert Ltd was recorded as follows: Share capital General reserve Retained earnings

$80 000 30 000 40 000

All the identifiable assets and liabilities were recorded at amounts equal to their fair values. Required

A. Prepare the consolidation worksheet entries at 1 July 2016 and 1 July 2017 assuming John Ltd paid $153 000 for the shares in Robert Ltd. B. Prepare the consolidation worksheet entries at 1 July 2016 and 1 July 2017 assuming John Ltd paid $148 000 for the shares in Robert Ltd. C. Prepare the consolidation worksheet entries at 1 July 2016 assuming John Ltd paid $145 000 for the shares in Robert Ltd and at that date Robert Ltd had recorded goodwill of $4000. A: Consideration of $153 000 Acquisition analysis: At 1 July 2016: Net fair value of identifiable assets and liabilities of Robert Ltd = Consideration transferred Goodwill acquired

= = = =

($80 000 + $30 000 + $40 000) (equity) $150 000 $153 000 $153 000 – $150 000 $3 000

Worksheet entries at 1 July 2016: Business combination valuation entries Goodwill Business combination valuation reserve

Dr Cr

3 000 3 000

Pre-acquisition entries Retained earnings (1/7/16) Share capital General reserve Business combination valuation reserve Shares in Robert Ltd

Worksheet entries at 1 July 2017 The entries are the same as those above.

Dr 40 000 Dr 80 000 Dr 30 000 Dr 3 000 Cr

153 000

B: Consideration of $148 000 Acquisition analysis: At 1 July 2016: Net fair value of identifiable assets and liabilities of Robert Ltd = Consideration transferred Gain on bargain purchase

= = = =

($80 000 + $30 000 + $40 000) (equity) $150 000 $148 000 $148 000 – $150 000 $2 000

Worksheet entries at 1 July 2016: Pre-acquisition entries Retained earnings (1/7/16) Share capital General reserve Gain on bargain purchase Shares in Robert Ltd

Dr Dr Dr Cr Cr

40 000 80 000 30 000

Dr Dr Dr Cr

38 000 80 000 30 000

2 000 148 000

Worksheet entries at 1 July 2017 Retained earnings (1/7/17) Share capital General reserve Shares in Robert Ltd

148 000

C: Consideration of $145 000 and recorded goodwill of $4000 Acquisition analysis: At 1 July 2016: Net fair value of identifiable assets and liabilities of Robert Ltd

Consideration transferred Gain on bargain purchase

= = = = =

($80 000 + $30 000 + $40 000) (equity) - $4 000 (goodwill) $146 000 $145 000 $145 000 – $146 000 $1 000

Worksheet entries at 1 July 2016: 1. Business combination valuation reserve entries Business combination valuation reserve Goodwill 2. Pre-acquisition entries

Dr Cr

4 000 4 000

Retained earnings (1/7/16) Share capital General reserve Business combination valuation reserve Gain on bargain purchase Shares in Robert Ltd

Dr Dr Dr Cr Cr Cr

40 000 80 000 30 000 4 000 1 000 145 000

Chapter 18 4. What are the key elements of control? There are 3 key elements: - Power over the investee - Exposure or rights to variable returns from the parent’s involvement with the subsidiary - The ability to use the power over the subsidiary to affect the amount of the parent’s returns. 9.

Is the non-controlling interest classified as a liability or equity? -

It is classified as equity as the group does not have a present obligation to outflow funds to those shareholders.

10. Are only those entities in which another entity owns more than 50% of the issued shares classified as subsidiaries? - No. The criterion for consolidation is not based on percentage ownership, but rather it is based on the concept of control. - However, when the percentage interest is below 50%, judgement on the existence of control is required. In forming this judgement, the accountant has to rely on evidence to form an opinion.

Case Study 10

Control

Daffy Duck Ltd has acquired, during the current year, the following investments in the shares issued by other companies: Elmer Ltd $120 000 (40% of issued capital) Fudd Ltd $117 000 (35% of issued capital) Daffy Duck Ltd is unsure how to account for these investments and has asked you, as the auditor, for some professional advice. Specifically, Daffy Duck Ltd is concerned that it may need to prepare consolidated financial statements under AASB 10. To help you, the company has provided the following information about the two investee companies. Elmer Ltd • The remaining shares in Elmer Ltd are owned by a diverse group of investors who each hold a small parcel of shares.

• Historically, only a small number of the shareholders attend the general meetings or question the actions of the directors. • Daffy Duck Ltd has nominated three new directors and expects that they will be appointed at the next annual general meeting. The current board of directors has five members. Fudd Ltd • The remaining shares in Fudd Ltd are owned by a small group of investors who each own approximately 15% of the issued shares. One of these shareholders is Elmer Ltd, which owns 17%. • The shareholders take a keen interest in the running of the company and attend all meetings. • Two of the shareholders, including Elmer Ltd, already have representatives on the board of directors who have indicated their intention of nominating for re-election. Required A. Advise Daffy Duck Ltd as to whether, under AASB 10, it controls Elmer Ltd and/or Fudd Ltd. Support your conclusion. B. Would your conclusion be different if the remaining shares in Elmer Ltd were owned by three institutional investors each holding 20%? If so, why?

A. Daffy Duck Ltd 40%

35%

Elmer Ltd

Fudd Ltd 17%

- NCI is a diverse group - low attendance at AGM - Daffy Duck Ltd expects to appoint 3/5 directors

- NCI is small group - keen interest - interested in directors

Consider the definition of control. Power to govern or capacity to control depends on an entity having the ability to direct the policies of another entity so as to affect the returns of that entity and to be able to use that power to increase those returns. Determination of control is a judgement. Ability to exert control depends on such factors as: - size of the voting interest - the dispersion of other shareholdings - level of disorganisation or apathy of the NCI shareholders - attendance at AGMs - contractual arrangements

-

arrangements between friendly parties

Applying these to the above example, it is expected that Elmer Ltd is a subsidiary. If Elmer Ltd is a subsidiary, then Fudd Ltd is also a subsidiary as Daffy Duck Ltd would control 52% of the vote. B. A change in the relative ownerships within Elmer Ltd would suggest that, dependent on other factors, it would lose its subsidiary status. Fudd Ltd would also then lose its subsidiary status...