CA_Topic02_2016SPR_2slide_c - INTRODUCTIONTO CONSOLIDATION...

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1 INTRODUCTION TO CONSOLIDATION Corporate Accounting (22754) Topic 2 Spring 2016 Required reading Leo Loftus: Chap 7 Consolidation: controlled entities (originally Chap 18) References: AASB 10, Corporations Act 2
2 Lecture outline At the end of the class you should be able to: Explain the concept of a group ; Discuss the advantages and limitations of consolidated financial statements ; Describe the definition of control and apply the definition to examples likely to be found in practice; Provide an overview of the methods of making a corporate acquisition ; Understand how reverse acquisitions are structured. 3 Corporate investments in other entities Companies often invest in other entities (e.g., companies, partnerships, etc.) The type of accounting for the investing company is dependent on the level of influence that the investing company (investor) has over the other entity (investee) 4
3 Overview of accounting for investments in other entities Level of influence Accounting requirement Accounting standard Covered Control Consolidated financial statements AASB 10 Topics 2 6 Significant influence Equity accounting AASB 128 Topic 7 Joint control Equity accounting or proportional consolidation AASB 11 Topics 8 9 Investments without influence Fair value with fair value changes recognised through profit and loss (trading investments) or directly in equity (available for sale investments) AASB 139 Not covered in this subject 5 Group structure Common for groups of companies to combine in pursuit of common goals Example of a group structure: X Ltd Y Ltd Z Ltd 100% 100% 6
4 Definitions Parent : an entity that has one or more subsidiaries (i.e., X Ltd ) Subsidiary : an entity, including a partnership, that is controlled by another entity (i.e., Y Ltd and Z Ltd ) Group : a parent and all its subsidiaries ( X , Y and Z Ltd ) Consolidated financial statements : the set of financial statements presented to show the results and financial position of a group as if it were operating as a single economic entity 7 Economic entity 8 Examples of economic entities At the end of the 2014 financial year: Woolworths Group comprised the parent and 187 subsidiaries BHP Billiton Group comprised the parent and 77 subsidiaries CommonwealthBank of Australia Group comprised of the parent and 30 subsidiaries Many subsidiaries are often located overseas
5 Advantages of consolidated financial statements The group is viewed as a single operating unit Relevant information: The investors have interest in the group as a whole, not just in the parent entity Comparable information across all groups Accountability: Provides information on the group to stakeholders in the parent entity to allow assessment of the performance of management in operating all resources under their control Reporting of risks and benefits: An entity rarely obtains control of another without obtaining significant risks and benefits.

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