Topic 3_Consolidation concepts - ACCT 4111 Advanced Financial Accounting Group Accounting I Concepts of Consolidation OBJECTIVES OF THE TOPIC(1(2(3(4(I

Topic 3_Consolidation concepts - ACCT 4111 Advanced...

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______________________________________________________________________________________________ Dr S.Kan/ACCT 4111/Oct 2012/Topic 3 Page 1 of 10 ACCT 4111 – Advanced Financial Accounting Group Accounting I – Concepts of Consolidation OBJECTIVES OF THE TOPIC (1) To define a subsidiary, a holding company, a group, NCIs, group accounts and consolidated F/Ss. (2) To describe the different types of group structure. (3) To discuss the legal requirements of group accounts, and the relevant requirements of HKFRS 10. (4) To explain the different consolidation concepts. (I) INTRODUCTION 1. Many businesses achieve expansion by purchasing a controlling interest in another business, which continues to exist as a legal entity after acquisition. This course of action results in a parent/ subsidiary relationship whereby the acquiring company becomes the parent company (or holding company) and the acquired company becomes the subsidiary. It also brings two previously separate undertakings under the control of a single management team. The uniting of separate business undertakings, as an alternative to internal expansion, aims to obtain operating efficiencies through vertical and horizontal integration of operations or to reduce business risk by diversification of operation. 2. There are several advantages of establishing a holding and subsidiary relationship as a means to achieve a BC. The acquired companies need not be dissolved, but each will continue to retain the legal status of a limited liability entity. By combining their resources, both tangible and intangible, the united entity acquires the established goodwill, product line, and market of the subsidiaries. 3. The relationship of parent/ subsidiary raises complicated accounting and legal problems. Accounting for groups is probably one of the most important and controversial topics of accounting theory and practice. Current accounting requirements for groups are governed by the Companies Ordinance, ss.124 – 28 and 129A, the Tenth Schedule and Twenty-third Schedule. They are also reflected in HKFRS 3 “ Business Combinations” and HKFRS 10 “ Consolidated and Separate Financial Statements” . (II) OVERVIEW OF INVESTMENTS Control HKFRS 9 Depending on classification of investment Significant influence or joint control Passive investment HKAS 28 for Associates & JVs (equity accounting) or HKFRS 11 for JAs (line-by-line accounting) (Equity method) HKFRS 10 for Subsidiaries (Consolidation) 100% voting rights 0% 20% 50%
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______________________________________________________________________________________________ Dr S.Kan/ACCT 4111/Oct 2012/Topic 3 Page 2 of 10 4. The following table summarises the different types of group investment and how they are accounted for: Investment Criteria Required treatment in group accounts Subsidiary Control Full consolidation (HKFRS 3 / HKFRS 10) Associate Significant influence Equity accounting (HKAS 28) Joint venture Joint control Equity accounting (HKFRS 11 / HKAS 28) Joint operation Joint control Line-by-line accounting (HKFRS 11) Other investment Asset held for accretion of wealth As for single company accounts per HKFRS 9 (III) REGULATORY FRAMEWORK FOR CONSOLIDATION (IV) DEFINITIONS OF PARENT AND SUBSIDIARY HKFRS 10 5. A “group” consists of “a parent and its subsidiaries”.
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