Preparing Consolidated Financials: Fair Value & Intra Group Trading Adjustments, Study notes of Financial Accounting

Download Preparing Consolidated Financials: Fair Value & Intra Group Trading Adjustments and more Study notes Financial Accounting in PDF only on Docsity! Strathmore Preparing @ sevens Consolidated SFP (1) The assets and liabilities of the parent and the subsidiary are added together on a line-by-line basis. (2) The investment in the subsidiary included in the parent's SoFP is replaced by a goodwill asset in the consolidated SoFP. (3) The share capital and share premium balances of the parent and subsidiary are not added together; only the parent entity balances for share capital and share premium are included in the consolidated SoFP. This reflects the fact that the consolidated SoFP includes all of the assets and liabilities under the control of the parent entity. (4) The amount attributable to non-controlling interests is calculated and shown separately on the face of the consolidated SoFP. (5) The group share of the subsidiary's post-acquisition retained earnings is calculated and included as part of group retained earnings. Note that it is not necessary for a parent to own all of the equity or voting shares in another entity to have control. Voting control is normally achieved by owning a majority (in excess of 50%) of the equity or voting shares. To the extent that there are ‘outside’ or 'external shareholders in the subsidiary, they are referred to as a a 'non-controlling interest’ i.e. they havea financial and voting interest in the subsidiary, but are not in a position to exercise control — that is done by the controlling parent. Adjustments There will be some adjustments that will be necessary in preparation of a consolidated SFP. These can be; 1. Fair Value Adjustment (FVA) 2. Intra Group Trading – Current Accounts 3. Provision for Unrealized Profits (PURP) Strathmore UNIVERSITY Fair Value Cont..... aie The fair value adjustment represents the amount required to adjust the relevant item from its current carrying amount in the SoFP to its identified fair value. Note that the total of issued share capital and share premium balances of the subsidiary will be the same at the date of acquisition and at the reporting date. If you have different values for issued share capital at these dates, either or both figures will be wrong. Similarly, if the subsidiary has a share premium account, the share premium carrying amount should be the same at both dates. (2) At the reporting date make the adjustment on the face of the SoFP when adding across assets and liabilities. @ Sener 1 UNIVERSITY 2. Intra Group Trading — = P and S may well trade with each leading to the following potential issues to be dealt with: * receivables and payables in P and S that effectively cancel each other out * dividends paid by the subsidiary recognised as income by the parent. Similarly, if a dividend is paid by one entity and received by the other, the net effect of this to the group is zero. * unrealised profits on sales of inventory between the parent and the subsidiary. So that you can understand this concept consider the following question: can you make a profit if your right hand sells goods to your left hand? Obviously not and for the same reason a group cannot make profit when one part of the group sells goods to another part. Strathmore Intra Group Trading UNIVERSITY Cont Current accounts If P and S trade with each other then this will probably be done on credit leading to: * — areceivables (current) account in one entity's SoFP * — apayables (current) account in the other entity's SoFP. These amounts should not be consolidated because the group would end up with a receivable to itself and a payable to itself - receivables and payables would consequently be overstated in the group SoFP. They are therefore cancelled (contra’d) against each other on consolidation. . . Strath Unrealized Profits @ Sarees ie Cont. If the seller is the subsidiary, the profit element is included in the subsidiary's accounts and relates partly to the group, partly to non- controlling interests (if any). Adjustment required: Dr Subsidiary retained earnings (deduct the profit in W2 - at reporting date) Cr Group inventory Strathmore UNIVERSITY Mid Year Acquisition ares If a parent entity acquires a subsidiary mid-year, the net assets must be calculated at the date of acquisition. The net assets at acquisition can be calculated as the net assets at the start of the subsidiary's financial year plus the retained for part of the year up to the date of acquisition, together with any fair value adjustments at the date of acquisition. To calculate this, it is normally assumed that S's profit after tax has accrued evenly throughout the year.