Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig...

Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig Deegan 28–1

Chapter 28

Further consolidation issues II:

Accounting for indirect interests and changes in degree of ownership of a subsidiary


Learning objectives

• Understand that the determination of the total ownership interest in a subsidiary must take account of both direct and indirect ownership interests

• Understand what an indirect equity ownership represents and how it is calculated

• Understand that the parent entity’s interest in the post-acquisition movements of a subsidiary’s retained profits and other reserves will be based upon the sum of the direct and indirect ownership interests

Continues/ …


Learning objectives (cont.)

• Understand that even in the presence of indirect ownership interests, the pre-acquisition capital and reserves of a subsidiary will be eliminated on consolidation on the basis of only the direct ownership interests

• Understand how to account for incremental investments in a subsidiary

• Understand how to account for the disposal of a subsidiary from the perspective of both the parent entity and the economic entity


Status of newly converged accounting standards

• From 2005, the new standard is AASB 127 ‘Consolidated and Separate Financial Statements’– This replaced AASB 1024 ‘Consolidated Accounts’

• There are two other standards of particular relevance:1. AASB 3 ‘Business Combinations’

2. AASB 138 ‘Intangible Assets’


Indirect ownership interests

• AASB 127 requires that:– the consolidated financial report include all subsidiaries

of the parent

• Subsidiary defined as (AASB 127):– an entity (including a partnership) that is controlled by

another entity (the parent)

• Control:– is the power to govern the financial and operating

policies of an entity so as to obtain benefits from its activities

– can arise through indirect interests, i.e. without any direct ownership interest

Continues/ …


Indirect ownership interests (cont.)

• Example of an indirect interest:– Insert Figure 28.1

Continues/ …



• Minority interests:– are that portion of the profit or loss and net assets of a

subsidiary attributable to equity interests that are not owned by the parent

• Also possible to hold both direct and indirect interests in a particular entity:– Insert Figure 28.2

Continues/ …


Indirect ownership interests (cont.)• Consolidation in the presence of indirect interests:

– Refer to Worked Example 28.1

• Choice of two methods in performing consolidation:1. Sequential-consolidation approach

– Consolidation of each separate legal entity with its controlled entities is performed sequentially (time-consuming and messy)

2. Multiple-consolidation approach – In eliminating investments held by the immediate parent

entities only direct interests are taken into account– Post-acquisition movements in subsidiaries’ shareholders’

funds allocated to ultimate parent entity on basis of sum of direct and indirect interests

Continues/ …



Journal entries• To eliminate parent’s investment in subsidiary:

Debit Share capital

Debit Retained earnings

Debit Goodwill

Credit Investment in subsidiary• To recognise impairment of goodwill associated with

acquisition:

Debit Impairment expense—goodwill

Credit Accumulated impairment losses—goodwill

Continues/ …



Journal entries (cont.)• To eliminate dividends proposed by subsidiary:

Debit Dividend payable (balance sheet)

Credit Dividend proposed (income statement)

Debit Dividend revenue (income statement)

Credit Dividend receivable (balance sheet)

Continues/ …



• Minority interests (AASB 127):– to be presented separately from the parent

shareholders’ equity in the consolidated balance sheet within equity

– to be separately disclosed in the profit or loss of the group


Increase in the ownership interest held in a subsidiary

• Parent entity might acquire additional shares in a subsidiary over time

• AASB 3 requires:– each exchange transaction to be treated separately by

the acquirer– that the cost of the transaction and fair value

information at the date of the transaction be used to determine the amount of any goodwill

– results in a step-by-step comparison of the cost of the individual investments

• Refer to Worked Example 28.2Continues/ …


Increase in the ownership interest held in a subsidiary (cont.)

Journal entires• To eliminate investment in subsidiary and

recognise goodwill (each acquisition to be accounted for separately):

Debit Share capital

Debit Retained earnings

Debit Goodwill

Credit Investment in subsidiary

Continues/ …



Journal entires (cont.)

• To recognise impairment of goodwill (separately for each acquisition):

Debit Impairment loss—goodwill

Credit Accumulated impairment losses—goodwill

Continues/ …



• To eliminate dividends proposed by subsidiary:

Debit Dividend payable (balance sheet)

Credit Dividend proposed (income statement)

Debit Dividend income (income statement)

Credit Dividend receivable (balance sheet)


Sale of shares in a subsidiary

• When a parent entity sells shares in a subsidiary:– profit or loss in its own individual accounts will be

different from that in consolidated accounts

• AASB 127 requires investments in subsidiaries etc. to be measured at either:– cost; or– in accordance with AASB 139, i.e. at fair value

Continues/ …


Sale of shares in a subsidiary (cont.)

• From the parent’s perspective, profit or loss on sale of shares is the difference between:– carrying value of shares; and – value of sales proceeds

• Carrying value:– is the amount shown in the financial statements for a

particular asset or liability

• From group’s perspective– Consideration to be given to economic entity’s share of

post-acquisition profits and reserve movements before determining profit or loss on sale of shares

Continues/ …



• Refer to Worked Example 28.3

Journal entries• To record sale of shares in parent’s journal:

Debit Cash


Credit Profit on sale of investment

Continues/ …



• Consolidation adjusting journal entries:Debit Profit on sale of investmentDebit Loss on sale of subsidiary

Credit Profit after taxCredit Retained profitsCredit Revaluation reserve

• Balance in revaluation reserve can be transferred to retained profits:

Debit Revaluation reserveCredit Retained profits

Continues/ …



• Discount generated on consolidation– Refer to Worked Example 28.4

Consolidation journal entries• To eliminate the first acquisition:

Debit Share capital

Credit Investment in subsidiary• To record assets at fair value in relation to

acquisition:

Debit Property, plant and equipment

Credit Revaluation reserveContinues/ …



Consolidation journal entries (cont.)• To eliminate the second acquisition:

Debit Share capital

Debit Capital profits reserve

Debit Retained profits

Debit Revaluation reserve


Credit Discount on acquisition

Continues/ …



Consolidation journal entries (cont.)• To eliminate discount on acquisition and treat it

as part of income:

Debit Discount on acquisition

Credit Gain on acquisition of investments


Summary

• The chapter considers how to account for indirect interests and changes in the degree of ownership in a subsidiary

• It is possible to control another entity without direct ownership, i.e. through an indirect ownership interest

• In accounting for additional acquisitions of shares, on consolidation, each investment acquisition must be eliminated separately

• When shares in a subsidiary are sold, profit or loss in individual investors’ accounts will be different from that in the consolidated accounts


Summary of main changes to accounting standards

• AASB 127 ‘Consolidated and Separate Financial Statements’ is generally consistent with AASB 1024 ‘Consolidated Accounts’

• Significant changes– Goodwill amortisation is prohibited and goodwill must

be subject to regular impairment testing– Discounts on acquisition now to be treated as part of

the profit or loss of the reporting period– Outside equity interests now referred to as minority

interests

Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig...

Documents

Transcript of Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 4e by Craig...