Lecture_Topic_9_Wholly_Owned_Subsidiaries_2xpage

Lecture_Topic_9_Wholly_Owned_Subsidiaries_2xpage - Chapter...

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Chapter 23 Consolidation: Wholly owned subsidiaries Prepared by Emma Holmes The consolidation process Before consolidating, it may be necessary to adjust subsidiary’s financial statements where: 1. The subsidiary’s end of reporting period is different to the parent’s. In such cases the subsidiary is required to prepare adjusted financial statements as at the parent’s reporting date. 2. The subsidiary’s accounting policies are different to the parent’s. In such cases the subsidiary is required to prepare adjusted accounts to ensure accounting policies consistent with the parent. Eg- 30 June vs. 31 December Eg- cost vs. revaluation methods of accounting for non-current assets
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The consolidation process Consolidation involves adding together the financial statements of the parent and subsidiaries and making a number of adjustments: Business combination valuation entries – required to adjust the carrying amounts of the subsidiary’s assets and liabilities to fair value at acquisition Pre-acquisitions entries – required to eliminate the carrying amount of the parents investment in each subsidiary against the pre-acquisition equity of that subsidiary Transactions between entities within the group subsequent to acquisition date (chapter 24) Consolidation journals are posted into the consolidation worksheet in “adjustment” columns as follows: P Ltd. $’000 S Ltd. Adjustments Cons. Balances DR CR Land 400 150 550 Invt in S Ltd 120 120 - Receivables 200 200 Cash 40 20 60 760 170 810 Share capital 500 100 100 500 Retained earnings 160 20 20 160 Creditors 100 50 150 760 170 810 Consolidation worksheets Parent Subsidiary DR balance Add down for sub-totals CR balance Extract only - All consol. journals recorded in these DR/CR columns - Where there are a large number of journals it is common to number them 1,2,3 etc. - Purpose- to remove the parent’s investment in the subsidiary and the effect of all interentity transactions so that the final column shows an “external view”
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Consolidation journal adjustments are ONLY prepared for the propose of consolidation They are posted onto the consolidation worksheet only- they are NOT recorded in the books of the parent or the subsidiary As a result, some consolidation adjustments are repeated every time consolidated accounts are prepared Consolidation worksheets Acquisition analysis The purpose of an acquisition analysis is to compare the cost of acquisition with the fair value of the identifiable net assets and contingent liabilities (FVINA) that exist at acquisition to determine whether there is: Goodwill on acquisition (where cost > FVINA) Bargain purchase (where cost < FVINA) Goodwill is an unidentifiable intangible asset that is calculated as a residual value Net assets = assets – liabilities = Equity NOT the book value We commonly determine the FVINA with reference to the equity balances of the subsidiary, rather than the individual asset and liability balances
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Hitech Ltd acquired all of the issued share capital of
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Lecture_Topic_9_Wholly_Owned_Subsidiaries_2xpage - Chapter...

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