Consolidated Financial Statements - Dr. Clive Vieland-Boddy by yurtgc548

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									  An Introduction to
    Consolidated
Financial Statements
Dr Clive Vlieland-Boddy FCA FCCA MBA
  Learning Objective 1


Recognize the benefits and
limitations of consolidated
   financial statements.
Business Combinations Created
  Through Stock Acquisitions

       Business combination


      One or more companies
      become subsidiaries of a
     common parent corporation
     The Reporting Entity

Parent                       Subsidiary
Financial                    Financial
Statements                   Statements
_____ _____                  _____ _____
_____ _____                  _____ _____
_____ _____                  _____ _____
_____ _____                  _____ _____
              Consolidated
              Financial
              Statements
              _____ _____
              _____ _____
              _____ _____
              _____ _____
     The Reporting Entity
    A parent company will normally acquire
       Companies that expand or assist in
Controlling their business. Horizontal or Vertical
                    Integration
         Sometimes they may acquire a
      subsidiary in a very different industry
    from its own as a means of diversifying
             its overall business risk.

   There are also legal reasons for
   maintaining separate identities.
The Parent-Subsidiary
    Relationship
     Parent Company


   Owns more than 50%
   of another company
       or controls it


   Associate Company
    The Parent-Subsidiary
        Relationship

            Parent Company

  100%                         80%
ownership                    ownership


  Subsidiary A         Subsidiary B
     Learning Objective 2


 Understand the requirements for
   inclusion of a subsidiary in
consolidated financial statements.
         Consolidation Policy




   Consolidated financial statements provide
information that is not included in the separate
     statements of the parent corporation.
    Consolidation Policy


A subsidiary can be excluded from
consolidation in only two situations:

1      Control is likely to be temporary.


       Parent holds less than 50%
2
      Consolidation Policy

Consolidation policy is usually presented
    under the following headings
        in accounting policies:


  Principles of            Basis of
  consolidation          consolidation
    Parent and Subsidiary with
     Different Fiscal Periods
Consolidated statements are prepared for and
  as of the end of the parent’s fiscal period.
If the difference does not exceed three months
    it is acceptable to use the subsidiary’s
           statements with disclosure.
      Learning Objective 3


Apply the consolidations concepts
  to parent company recording of
   the investment in a subsidiary
company at the date of acquisition.
   Consolidated Balance Sheet at Date
   of Acquisition (100% at Book Value)
Assets                  Sub A      Sub B     Consolidated
Current assets
 Cash                   $ 20,000   $10,000      $ 30,000
 Other current assets     45,000    15,000        60,000
Total current assets    $ 65,000   $25,000      $ 90,000
Plant assets            $ 75,000   $45,000      $120,000
 Less: Accum. depr.       15,000     5,000        20,000
Total plant assets      $ 60,000   $40,000      $100,000

Total assets            $125,000   $65,000      $190,000
      Consolidated Balance Sheet at Date
      of Acquisition (100% at Book Value)
Liabilities                  Sub A      Sub B     Consolidated
Current liabilities
 Accounts payable            $ 20,000   $15,000      $ 35,000
 Other current liabilities     25,000    10,000        35,000
Total current liabilities    $ 45,000   $25,000      $ 70,000
Stockholders’ equity
 Capital stock               $100,000   $30,000      $100,000
 Retained earnings             20,000    10,000        20,000
Total stockholders’ equity   $120,000   $40,000      $120,000
Total liabilities and
 stockholders’ equity        $165,000   $65,000      $190,000

BUT: Sub A is 100% and Sub B is 80% owned
  Learning Objective 4


 Allocate the excess of the
 investment cost over the
book value of the subsidiary
 at the date of acquisition.
      Consolidated Balance Sheet at Date
      of Acquisition (100% at Book Value)
Liabilities                  Sub A      Sub B     Consolidated
Current liabilities
 Accounts payable            $ 20,000   $15,000      $ 35,000
 Other current liabilities     25,000    10,000        35,000
Total current liabilities    $ 45,000   $25,000      $ 70,000
Stockholders’ equity
 Capital stock               $100,000   $30,000      $100,000
 Retained earnings             20,000    10,000        20,000
Total stockholders’ equity   $120,000   $40,000      $120,000
Total liabilities and
 stockholders’ equity        $165,000   $65,000      $190,000
Less: Minority Interest         Nil      $8,000        $8,000
Consolidated Numbers         $165,000   $57,000      $182,000
      Parent Acquires 100% of
      Subsidiary with Goodwill

Purchased all the shares of Sub B for $50,000.


    Sub B shareholder’s equity is $40,000.


 What is the consolidating (eliminating) entry?
     Parent Acquires 100% of
     Subsidiary with Goodwill
Capital Stock                        30,000
Retained Earnings                    10,000
Goodwill – The Excess paid           10,000
Investment in Sub A                  50,000
To eliminate reciprocal investment and equity
accounts and to assign the excess of
Investment cost over book value acquired
to goodwill
 Learning Objective 5


Understand the Balancing
 Entry on Acquisition and
    Minority Interests
                Goodwill
• This represents the difference between the
  Price paid for the Company over and
  above the Net Assets of the company.
• Note that net assets are the Total assets
  less the total liabilities. This is also the
  same as the total shareholders funds.
            Minority Interest

  Minority interest in subsidiaries is generally
shown in a single amount in the liability section
      of the consolidated balance sheet

   The alternatives are to include the minority
 Interest in consolidated stockholders’ equity or
to place it in a separate minority interest section
        Minority Interest

  The interest of minority
 stockholders represents
 equity investments in the
 consolidated net assets
by the other shareholders.
     Learning Objective 7


  Prepare consolidated balance
 sheets subsequent to the date
     of acquisition, including
preparation of eliminating entries.
          Parent Company
• Get Big Corp acquires a subsidiary called
  ABC Ltd.
 Effect of Allocation on Consolidated
     Balance Sheet at Acquisition


On 1st Jan, 2010, Get Big purchases 90%
  of ABC Ltd shares $10,000,000 cash
  Effect of Allocation on Consolidated
      Balance Sheet at Acquisition

ABC Ltd in $000’s        Book Value   Fair Value
Assets
  Cash                     $ 200       $ 200
  Net receivables             300         300
  Inventories                 500         600
  Other current assets     400         400
  Land                        600         800
  Building, net             4,000       5,000
  Equipment, net            2,000       1,700
Total assets               $8,000      $9,000
  Effect of Allocation on Consolidated
      Balance Sheet at Acquisition

ABC Ltd in $000’s Book Value   Fair Value
Liabilities
   Accounts payable   $ 700     $ 700
   Notes payable       1,400     1,300
Common stock           4,000
Share Premium          1,000
Retained Earnings        900
Total liabilities and
 stockholders’ equity $8,000
  Effect of Allocation on Consolidated
      Balance Sheet at Acquisition

ABC Ltd in $000’s     Book Value   Fair Value
Shareholders Funds
Common stock               4,000
Paid-in capital            1,000
Retained earnings            900
Total Shareholders’ Funds $5,900
    Allocation of Excess Cost
     over Underlying Equity


Investment in Sand              $10,000,000
Book value of interest acquired
$5,900,000 × 90% =               (5,310,000)
Excess of cost over BV          $ 4,690,000
      This represents GOODWILL
           Impairment Test
• Goodwill is subject to an impairment test.
• This means that it is not the book value
  but the “Fair Value or Mark to Market
  Value” that has to be used.
      Allocation of Excess Cost
       over Underlying Equity
                        Fair   Book           Excess
                       Value – Value × 90% = Allocated

Inventories             600     500             90
Land                    800     600            180
Building net          5,000   4,000            900
Equipment, net        1,700   2,000          (270)
Notes payable         1,300   1,400             90
Total allocated                                990
Remainder to goodwill                        3,900
Total                                        4,890
   Learning Objective 8


Apply the concepts underlying
preparation of a consolidated
     income statement.
Consolidated Income Statement


The difference between a consolidated and
an unconsolidated income statement of the
parent company lies in the detail presented
    rather than the net income amount.
                    BP Consolidated
                     Balance Sheet
Equity
Share capital                         5,183    5,179
Reserves                          89,804      96,434
BP shareholders’ equity           94,987 101,613
Minority interest                      904      500
Total equity                      95,891 102,113
The End

								
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