Lecture_Topic_9_Controlled_Entities_2xpage

Lecture_Topic_9_Controlled_Entities_2xpage - Chapter 22...

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Chapter 22 Controlled entities: the consolidation method Prepared by Emma Holmes Forms of controlled entities Business combinations can take a number of forms. Common examples are: Acquisition of shares in another entity Formation of a new entity to acquire the shares of another entity Dual-listed entities – eg BHP Billiton
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Applying the consolidation method Consolidation – process of preparing single set of financial statements for group of entities under control of one of those entities Involves combining financial statements of individual entities to show financial position and performance of group as if it were single entity Group – a parent and all it subsidiaries Parent – an entity that has one or more subsidiaries Subsidiary – an entity that is controlled by another entity Applying the consolidation method A Ltd B Ltd Parent Subsidiary “control” must exist (more on this later) The economic entity is referred to as the “A Ltd Group”
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Consolidated financial statements are prepared by (i) Aggregating (combining), line by line, like items of assets, liabilities, equity, income and expenses (ii) Adjusting these combined figures for inter- group transactions between entities within the group (covered in following weeks) Applying the consolidation method Criterion for identifying parent-subsidiary relationship is control Definition of control - power to govern financial and operating policies of entity so as to obtain benefits from its activities Note 2 elements Power Criterion – ability to direct financial and operating policies Benefit Criterion – ability to obtain benefits from other entity Both elements must be present for control to exist Control
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1. Passive versus active control – entity having capacity to control may not actually be involved in management of controlled entity 2. Non-shared Control - Two or more entities cannot share control 3. Level of Share Ownership - Control may be unilateral or effective, depending on level of share ownership Control element 1 – Power criterion Requires CAPACITY to control - not ACTUAL control Factors in determining the existence of capacity
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This note was uploaded on 09/14/2011 for the course ACCT 1001 taught by Professor John during the Spring '11 term at Renmin University of China.

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Lecture_Topic_9_Controlled_Entities_2xpage - Chapter 22...

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