ACCT4070-L2_-_Group_Reporting_-_Consolidation_Theories

ACCT4070-L2_-_Group_Reporting_-_Consolidation_Theories -...

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Advanced Accounting I
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Group Reporting (2) - Consolidation Theories
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Learning Objectives After reading Chapter 2, you should be able to: Understand the concept of business combinations Understand the different theories relating to consolidation Understand the effects of “Parent Theory” and “Entity Theory” of consolidation
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Unit Outline Overview of Consolidation Theories Accounting for Business Combinations – Purchase of Net Assets versus Purchase of Equity The Implicit Consolidation Theory underlying IFRS3 Illustration – Parent v. Entity Theory Consolidation Process - Overview
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Consolidation Theories Theories relating to consolidation are critical when the percentage of ownership in a subsidiary is less than 100% Termed “partially owned subsidiary”, where the remaining percentage is owned by shareholders who are collectively referred to as “non-controlling interest” (NCI) Parent 90% Subsidiary Non-controlling interests 10% Both parent and non-controlling interest have a proportionate share of the subsidiary’s: Net profit; Dividend distribution; Net Assets (i.e. Share Capital + Reserves)
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Consolidation Theories Reasons why non-controlling interest arise Parent company sells part of its stake in a subsidiary to external shareholders Parent company buys a majority stake in a subsidiary from existing owners Parent and non-controlling shareholders are founding shareholders of newly incorporated entity
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Consolidation Theories Ownership of the combined entity involving a wholly owned subsidiary Parent company’s shareholders Parent company Subsidiary 100% ownership Wholly owned by the parent company’s shareholders Joint-ownership of the combined entity involving a partially owned subsidiary Parent company’s shareholders Parent company Subsidiary 70% ownership Non-controlling shareholders of a subsidiary 30% ownership in subsidiary 2 groups of shareholders 1)The parent company’s shareholders; and 2)The non-controlling shareholders of the subsidiary
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Theories that might serve as a basis for preparing consolidated financial statements: Proprietary theory Parent Theory Entity Theory Different Theories to Consolidation
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Recognition of Subsidiary Income
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Views the firm as an extension of its owners. Assets and liabilities of the firm are considered to be those of the owners. Results in a pro rata consolidation (proportionate consolidation) where the parent consolidates only its proportionate share of a less-than-wholly owned subsidiary’s assets, liabilities, revenues and expenses. Proprietary Theory
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Proprietary Theory Less critical to determining choice of consolidation policies Relevant to accounting for joint venture Parent is seen as having a direct interest in a subsidiary’s assets and liabilities resulting in proportionate consolidation .
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Focuses on the reporting objective to provide information primarily for the shareholders of the Parent company.
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