Unit 11 - Group Accounts I - v3

Unit 11 - Group Accounts I - v3 - Unit 11 – Group...

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Unformatted text preview: Unit 11 – Group Accounting I - Companies Ordinance - HKAS 27 “Consolidated and Separate Financial Statements” Slide no.1 Definition of Subsidiary Company – Companies Ordinance HK Companies Ordinance (S.2) adopts two criteria – Control, or – Ownership Control - control the composition of Board of Directors, or - control more than half of the voting power Ownership - holds more than half of the issued share capital, or - a sub-subsidiary relationship Slide no.2 Definition of Subsidiary Company – HKAS 27 • HKAS 27 defines a subsidiary is “an entity that is controlled by another entity”. Therefore, HKAS 27 focuses on control, and an entity may include not only a company but other forms of businesses e.g. partnership, trust etc. Meaning of control – Power to govern the financial and operating policies so as to obtain benefits from its activities General rule – usually control exists when a company owns (directly/indirectly) > 50% of voting power unless a few exceptions Slide no.3 • • Definition of Subsidiary Company – HKAS 27 • Control may also exists even if owns 50% or less of the voting power of an entity when: – Power over more than half of the voting rights by agreement or control contract, or – Power to appoint or remove the majority of the members of Board of Directors or equivalent governing body, or – Power to cast the majority of votes at meetings of Board of Directors or equivalent governing body, or – Power to govern the financial and operating policies under a statue or an agreement Slide no.4 Conflicts between the Companies Ordinance and HKAS 27 • Hong Kong Companies Ordinance 2005 (Amendment) – To align the meaning of “Subsidiary” with the meaning of “Subsidiary” under the accounting standards – Introduce the new concept of “subsidiary undertaking” and “parent undertaking” – “Undertaking” can be a body corporate, a partnership or an unincorporated association carrying on a trade or business, whether for profit or not Slide no.5 Conflicts between the Companies Ordinance and HKAS 27 – The new 23rd Schedule of the Companies (Amendment) Ordinance 2005 enables Hong Kong incorporated companies to use the definition of subsidiary in HKAS 27 for the purpose of preparing group accounts. – New tests for “subsidiary” • The right to exercise a dominant influence from one undertaking (parent) over another undertaking (subsidiary) • Who controls the board of directors in addition to voting rights Slide no.6 Parent / Subsidiary Relationship Control by Dominant Influence • Both the investor company and the investee company retain their individual and separate identities. A majority holding constitutes what is termed a controlling interest and has ‘the right to exercise a dominant influence’. A dominant influence means that the holder of it (i.e. the investor company) has a right to give directions with regard to the operating and financial policies of the investee company. Slide no.7 Preparation of Group Accounts – Legal Requirement Company having subsidiaries, but not a wholly owned subsidiary of another company, have to prepare group accounts (S.124(1)) • Group accounts are the financial statements of the group (i.e. the parent and its subsidiaries) • May be in a number of forms and presentations, it is generally accepted that consolidated financial statements defined in HKAS 27 are the best means of achieving the objective of giving a true and fair view of the group. . Slide no.8 Preparation of Group Accounts – HKAS 27 • A holding company, except for a parent that is a wholly–owned subsidiary of another company, should prepare group accounts in the form of a single set of consolidated financial statements i.e. the financial statements of a group (the parent and its subsidiaries) presented as those of a single economic entity in order to give a view of the profit and loss and of the state of affairs of the group as a whole. •Exception: when a subsidiary is classified as held for sale and accounted for in accordance with HKFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”. •A parent elects not to consolidate the subsidiary’s financial statements should present separate unconsolidated subsidiary’s financial statements. •The investment in subsidiaries in parent’s separate financial statements should be accounted for at cost (less any impairment loss) or as an investment under HKAS 39 “Financial Instruments: Recognition and Measurement”. Slide no.9 CONSOLIDATION PROCEDURES Investment in each Subsidiary Eliminated Intra-group Balances and Intra-group Transactions and Unrealised Profits, if any Eliminated Slide no.10 Portion of Sub’s Equity at Acquisition Date Consolidation Procedures • In preparing the consolidated financial statements, the financial statements of the parent and its subsidiaries are combined on a lineby-line basis by adding together like items of assets, liabilities, equity, expenses and income. The following steps are then taken: – Adjust any dividends received, goods / cash in transit, in parent’s books; – Compute the goodwill on consolidation, minority interest and consolidated retained profits; – Eliminate the parent’s portion of a subsidiary’s equity at acquisition date against the carrying amount of the parent’s investment; – Eliminate intra-group balances and transactions, including income, expenses and proposed dividends; – Account for the minority interest; – Adjust for impairment of goodwill, if any. Slide no.11 Pre-acquisition and Post-acquisition Profits of Subsidiary Pre-acquisition Profits Post-acquisition profits Represents part of net asset of the subsidiary acquired Capital in nature and regarded as not distributable Acquisition date Earned by the subsidiary after the acquisition by the parent Regarded as distributable and included as part of consolidated profits (reserves) in the B/S Balance sheet date From the view point of the group Slide no.12 Pre-acquisition and Post-acquisition Profits / Reserves • When a subsidiary has reserves at the date of acquisition, those reserves are treated as part of the ‘Parent’s portion of equity’ and the calculation of goodwill also includes this relevant proportion of the reserves. These reserves are termed as ‘Pre-acquisition reserves’. • Any amount (positive or negative) created or aggregated in the reserves after the date of acquisition is termed as ‘Post-acquisition reserves’. The relevant proportion of this part of the reserves would be included in the consolidated retained profits. Slide no.13 Partial Acquisition and Minority Interest H 80% 80% owned by H Ltd. S Accounting issues: • How to account for partial acquisition in group a/c ? • How to account for minority interest in group a/c ? 20% Minority interest Slide no.14 Accounting for Partial Acquisition Two different approaches to consolidation: Group accounts To include 100% of assets & liabilities of S Ltd. To include 80% of assets & liabilities of S Ltd. Full consolidation Adopted by HKFRS 3 Proportional consolidation Slide no.15 Accounting for Minority Interest • Minority interests are that portion of the profit or loss and net assets of subsidiaries attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent. • Thus, the minority shareholders’ share of the portion of the share capital and reserves (including accumulated profits) of the subsidiary is presented, although within equity, as a separate item from the parent shareholders’ equity in the consolidated financial statements. Slide no.16 Example 1 Assume that H Ltd. acquired only 2,400,000 shares in S Ltd., ie 80% of the share capital of S Ltd. on 30 June 20X1 and H Ltd. is preparing its financial statements as of 31 December 20X1. Slide no.17 Example 1 - Income Statements of H & S at 31 December 20X1 H Ltd $000 10,280 (6,820) 3,460 (490) (900) (540) 1,530 (30) 1,500 S Ltd $000 4,500 (3,000) 1,500 (160) (280) (40) 1,020 (20) 1,000 Turnover Cost of sales Gross profit Distribution costs Administration expenses Other operating expenses Profit before tax Income tax expense Profit for the year Slide no.18 Example 1 - Balance Sheets of H & S at 31 December 20X1 H Ltd $000 Fixed Assets 4,000 Investments in S Ltd. 3,800 Current Assets 2,400 10,200 Ordinary Share Capital of $1 each 8,000 Retained Profits 1,900 9,900 Current Liabilities 300 10,200 S Ltd $000 3,200 1,000 4,200 3,000 1,000 4,000 200 4,200 Slide no.19 Solution to Example 1 Consolidated Schedule : (Assume book value equals to fair value) 1. Calculation of Goodwill: Cost of Investment in S Ltd. Less: Net Assets of S Ltd.(at acquisition date) Share Capital Retained Profits (pre-acquisition profits = $1,000 x 6/12) $000 $000 3,800 3,000 500 3,500 2,800 1,000 Slide no.20 Group’s share at 80% Goodwill on Consolidation Solution to Example 1 Consolidated Schedule: $000 1. Minority Interest: Share capital Retained Profits 20% thereon 3,000 1,000 4,000 800 Slide no.21 Solution to Example 1 Consolidation Schedule: 3. Calculation of Consolidated Retained Profits: $000 H Ltd S Ltd: at balance sheet date 1,000 Less: pre-acqui. profit ($1,000 x 6/12) 500 post-acqui. profit 500 Group’s share 80% Note: $000 1,900 400 2,300 $500 (profit at acquisition date i.e. pre-acquisition profits) 80% eliminated against Cost of Investment 20% goes to Minority Interest Slide no.22 Solution to Example 1 Consolidation Journals: 1. Share Capital–S Ltd. ($3,000 x 80%) Retained Profits – S Ltd. ($500x80%) DR 2,400 400 1,000 CR Goodwill Investment in S Ltd. 2. Share ($3,000x20%) 3,800 Ltd 600 200 800 Slide no.23 capital-S – S Retained Profits ($1,000x20%) Ltd. Minority Interest Solution to Example 1 Consolidation Worksheet: H Ltd Fixed Assets Investment in S Ltd Current Assets Goodwill on Consolidation $’000 4,000 3,800 2,400 10,200 Ordinary Share Capital Retained Profits 8,000 1,900 9,900 Minority Interest Current Liabilities 300 10,200 S Ltd $000 3,200 0 1,000 4,200 3,000 1,000 4,000 Elimination Dr Cr Group $’000 7,200 0 3,400 1,000 11,600 8,000 2,300 10,300 800 500 11,600 Slide no.24 3,800 1,000 2,400 600 200 400 800 200 4,200 4,600 4,600 Solution to Example 1 Consolidated Balance Sheet at 31 December 20X1 Fixed Assets Goodwill Current Assets Current Liabilities $000 7,200 1,000 3,400 11,600 500 11,100 8,000 2,300 10,300 800 11,100 no.25 Slide Ordinary Share Capital Retained Profits Minority Interest Solution to Example 1 H Ltd Group Consolidated Income Statement for the year ended 31 December 20X1 $000 12,530 (8,320) 4,210 (570) (1,040) (560) 2,040 (40) 2,000 Turnover (10,280 + 4,500 x 6/12) Cost of sales (6,820 + 3000 x 6/12) Gross profit Distribution costs (490 + 160 x 6/12) Administration expenses (900 + 280 x 6/12) Other operating expenses (540 + 40 x 6/12) Profit before tax Income tax expense (30 + 20 x 6/12) Profit for the year Attributable to: Equity holders of the parent (1,500 + 500 x 80%) Minority Interest (500 x 20%) 1,900 _ 100 2,000 Slide no.26 Elimination of Inter-company Dividends Group S Proposed Dividends H Dr Proposed Dividends Cr Retained Profits Slide no.27 Elimination of Inter-company Transactions & Balances (Current Accounts) e.g. H Ltd purchased goods from S Ltd e.g. S Ltd sold goods to H Ltd Cancel out of inter-company indebtedness H Ltd Cr Current a/c With S Ltd (creditor) S Ltd Dr current a/c With H Ltd (debtor) Any discrepancies between these accounts resulted from cash in transit or goods in transit Slide no.28 Example 2 The balance sheets of H Ltd and S Ltd at 31 December 20X2 are as shown below: H Ltd S Ltd $000 $000 Fixed assets Investment in S Ltd Current assets Current account with S Ltd Less: Current liabilities Creditors Current amount with H Ltd Share capital ($1 shares) Retained profits Proposed dividends 9,000 2,100 3,000 1,300 15,400 (1,200) _____14,200 10,000 3,200 1,000 14,200 2,800 1,800 4,600 (400) (900) 3,300 2,000 900 400 3,300Slide no.29 Example 2 • H Ltd acquired 80% of the shares in S Ltd on 1 January 20X0 when the retained profits of S Ltd were $400,000. • H Ltd and S Ltd declared dividends of $1M and $400K respectively on 31 December 20X2. • At the year end, there are in transit: – Goods, from H Ltd to S Ltd : – Cash, from S Ltd to H Ltd : $300,000 and $100,000 • Goodwill is impaired by the amount of $108,000. Slide no.30 Solution to Example 2 Journal Adjustments (in H’s books): Option 1 All adjustments are done in parent’s books, no matter those transits are to or from parent: Goods in Transit Current account with S Ltd Cash in Transit Current account with S Ltd Current a/c with S becomes : 900 (1300-300-100) Current a/c with H unchanged: 900 DR CR $000 $000 300 300 100 100 Slide no.31 Alternative Journal Adjustments: Option 2 • Goods in Transit (in S’s Books) – Dr • Cr goods in transit 300,000 current a/c with H 300,000 • Cash in Transit (in H’s Books) – Dr • Cr cash in transit 100,000 current a/c with S 100,000 After the above adjustments – (‘000) Current a/c with S becomes: 1200 (1300 - 100) Current a/c with H becomes: 1200 (900 + 300) Slide no.32 Solution to Example 2 Consolidation Schedules: 1. Calculation of Goodwill $000 Cost of Investment in S Ltd Net assets of S Ltd (at acquisition date) Share Capital 2,000 Retained Profits (Pre-acqui. 400 Profits) 2,400 80% H’s Share Less: Goodwill Impairment $000 $2,100 1,920 180 108 72 Slide no.33 Solution to Example 2 Consolidation Schedules: 2. Consolidated retained profits H Ltd: $3,200 S Ltd: Retained Profits + Proposed Div. Pre-acquisition Profits Post-acquisition Profits $000 1,300 400 900 @80% $000 3,200 Less: Impairment of Goodwill 720 3,920 108 3,812 Slide no.34 Solution to Example 2 Consolidation Schedules: 3. Minority Interest (at B/S date) Share Capital Retained Profits + Proposed Div.(900+400) $ Minority Interest at 20% 2,000 1,300 3,300 660 Slide no.35 Consolidation Journal 1. Share Capital – S Ltd (2,000 x 80%) Retained Profits – S Ltd (400 x 80%) Goodwill on Consolidation Investment in S Ltd 1. Consolidated Retained Profits Goodwill on Consolidation Share Capital – S Ltd (2,000 x 20%) Retained profits – S Ltd [(900+400)x20%] Minority Interest Current Account with H Ltd (use option 1) Current Account with S Ltd Proposed Dividends – S Ltd Retained Profits – S Ltd $000 1,600 320 180 $000 2,100 108 108 400 260 660 900 900 400 400 Slide no.36 1. 1. 1. Solution to Example 2 - Consolidation Worksheet Fixed assets Investment in S Ltd Current assets Goods in transit Cash in transit Current account with S Ltd H Ltd $’000 9,000 2,100 3,000 S Ltd $’000 2,800 0 1,800 Dr Cr 2.100 300 100 1,300 0 300 100 900 108 Group $’000 11,800 0 4,800 300 100 0 Goodwill on consolidation Less: Current liabilities Creditors Current a/c with H Ltd ______ 15,400 (1,200) 0 14,200 10,000 3,200 _______ 4,600 (400) (900) 3,300 2,000 900 180 72 17,072 (1,600) 0 15,472 10,000 3,812 900 Ordinary share capital Retained profits 1,600 400 320 260 108 400 400 4,808 660 4,808 Proposed dividends Minority Interest 1,000 14,200 400 3,300 1,000 660 15,472 Slide no.37 Example 2 Solution Fixed assets Goodwill Current assets Goods in transit Cash in transit Current liabilities Creditors Consolidated Balance Sheet at 31 December 20X2 $000 $000 11,800 72 4,800 300 100 17,072 1,600 15,472 10,000 3,812 1,000 14,812 660 15,472 lide no.38 S Share capital Retained profits Proposed dividends Minority interest Elimination of Inter-company Dividends from Pre-acquisition Profits • If dividend paid by the subsidiary to holding company out of the profits in existence at the date of acquisition (i.e. pre-acquisition profits), it is regarded as: – A reduction in the cost of investment in the subsidiary – NOT treated as revenue in the accounts of the holding company Slide no.39 Example 3 Balance sheets of H Ltd and S Ltd at 31 December 20X1 when H Ltd acquired 80% of the shares in S Ltd: H Ltd $000 6,000 1,800 2,000 9,800 (1,000) 8,800 S Ltd $000 2,000 700 2,700 (1,000) 1,700 Fixed Assets Investment in S Ltd Current Assets Current Liabilities 8,000 1,200 800 500 8,800 1,700 Assume that immediately after the share purchase, S Ltd paid a dividend of $500,000 on 1 January 20X2. Slide no.40 Share Capital - $1 shares Retained profits Example 3 Receipt of dividend out of pre-acquisition profits (assuming the receipt of dividend not yet recorded in H’s books) Journal adjustment in H’s books for receipt of dividend is: Dr. Bank ($500K x 80%) $400,000 Cr. Investment in S Ltd $400,000 (Being dividends received from S Ltd out of preacquisition profits) Slide no.41 Example 3 The goodwill on consolidation calculated at 1 January 20X2, taken into account of pre-acquisition dividends, is as follows: Cost of Investment in S Ltd Less: Pre-acquisition Dividends Net assets of S Ltd: Share Capital ($1,200,000 x 80%) Goodwill on Consolidation $000 1,800 400 1,400 960 440 Slide no.42 Example 3 H Ltd’s balance sheet would be as follows: $000 Fixed Assets 6,000 Investment in S Ltd 1,400 Current Assets 2,400 9,800 Current Liabilities (1,000) 8,800 Share Capital Retained profits 8,000 800 8,800 Slide no.43 Readings • AFA: Chapter 26 • Ref: Companies Ordinance, HKAS 27 44 ...
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This note was uploaded on 03/21/2011 for the course ACCOUNTING 110 taught by Professor Mcwilliams during the Spring '09 term at San Jose State.

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Unit 11 - Group Accounts I - v3 - Unit 11 – Group...

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