CONSOLIDATION

PART 1

JOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752 0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

JOIN KHALID AZIZ

FRESH CLASSES ICap module b & d

FINANCIAL ACCOUNTING & COST ACCOUNTING

INDIVIDUAL & GROUPS

JOIN KHALID AZIZ

CRASH CLASSES OF MAECONOMICS-EXTERNAL PREVIOUS..MICRO AND STATISTICS IN JUST 15 DAYS

Announcements
Supplementary Workshops Commence this week Schedule on Class-share All queries to Rajni Test 3 Saturday 9:00 AM Foreign Currency & Liquidation

Revision
Last week, we learnt about 3 forms of business combinations Do you remember what they are?

Revision
A 1. Acquires control of Bs net assets 2. Acquires control of Bs net assets 3. Liquidates B Liquidates
Type 1 and 2 are both ACQUISITIONS

Continues, holding shares in A Liquidates A new entity (C) is formed

In Type 3, A and B have MERGED

Revision
Apart from these, a business combination may take another form When 1 company acquires the shares of another company, rather than its net assets
Over the next 3 weeks, we will concentrate on business combinations involving acquisition of shares

Learning Objectives
You will be able to 1. Define an Economic Entity 2. Explain the concept of Control 3. Identify factors that indicate Control 4. Differentiate between pre & post acquisition equity 5. Explain the purpose of Elimination Entries

Learning Objective 1

1.a Economic Entity

An economic entity (or group) includes

a controlling entity &

1 or more controlled entities,

operating together
to achieve objectives consistent with those of the controlling entity

1.a Economic Entity

Example Amalgamated Telecom Holdings Limited (ATH)

ATH
Telecommunications

Telecom Fiji
Domestic Telecommunications

Vodafone Fiji
Cellular Mobile Telecommunications

1.b Economic Entity

An economic entity constitutes a reporting entity. Therefore,

1. An additional set of accounts must be prepared Known as Consolidated Statements 2. Using a Consolidation Worksheet Not in the books of an individual company

1.b Economic Entity

Statements of Telecom Statements of FINTEL Consolidation Worksheet Statements of Vodafone Statements of Connect Statements of Fiji Directories

Consolidated Statements of ATH

Learning Objective 2

2. Control
What is meant by control? In the context of consolidation

2.a Control
Control exists, where one entity is able to influence decision-making of another entity both financial & operating to enable the controlled entity to operate with it in achieving its own objectives

2.a Control
Decision Rules If one entity owns more than 50% of the shares in another other entity Control is presumed to exist Control may be Direct or Indirect

2.b Direct & Indirect Control

FNPF (58.2%)
Direct Control (Parent) of ATH Indirect Control of Telecom & FINTEL

ATH
Direct Control (Parent) of Telecom & Vodafone

Telecom (100%)
Subsidiary of ATH

Vodafone (51%)
Subsidiary of ATH

Learning Objective 3

3. Factors indicating Control

Can control exist when an entity owns less than 50% of the shares in another entity?

Yes, if certain factors are met

3. Factors indicating Control

Does the entity have the capacity to 1. Dominate composition of Board of Directors? 2. Appoint or remove all or a majority of the Directors? 3. Cast the majority of votes at a meeting of the Board? 4. Control the casting of a majority of votes at a meeting of the Board? Can you see why control is linked to Share Ownership?

3. Factors indicating Control

Example ATH does not own any shares in FINTEL 51% owned by Fiji Government 49% by Cable & Wireless However, ATH has rights to manage Governments shares As such, it is able to cast a majority of votes

JOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752 0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

Learning Objective 4

4. Pre & Post Acquisition Equity

We are talking about equity of the subsidiary. At any time, equity can be divided into 1. Pre-acquisition Equity 2. Post-acquisition Equity

What is the difference between them?

4. Pre & Post acquisition Equity

Subsidiarys Pre-acquisition Equity Existing Capital, Reserves & Retained Profits Subsidiarys Postacquisition Equity Additional Capital, Reserves & Retained Profits

Date of Acquisition

4. Pre & Post Acquisition Equity

The distinction is important because

1. Cost of acquisition is compared with pre-acquisition equity to determine goodwill 2. Treatment of dividends differs for pre & post acquisition equity

Example 1
On 1 April 2006, Tonga Ltd acquired all the shares of Nuku Ltd for a cash payment of $225,000 On that date, the equity of Nuku Ltd consisted of Share Capital $150,000 Reserves $ 30,000 Retained Profits $ 20,000

Required Record the combination in the books of Tonga Ltd

Business Combinations
Step 1

Calculate Fair Value of Identifiable Net Assets Acquired (FV of INA)

Step 2

Calculate Cost of Acquisition (COA)

Step 3

Calculate Goodwill or Negative Goodwill

Step 1

Calculate Fair Value of Identifiable Net Assets

Since A-L = OE
Fair value of identifiable net assets

Can also be calculated from the equity of the acquiree

Step 1

Calculate Fair Value of Identifiable Net Assets

Amount
150,000

Equity Item
Share Capital

Reserves
Retained Profits Total

30,000
20,000 $200,000

Step 2

Calculate Cost of Acquisition

Immediate cash payment of $225,000

Step 3

Calculate Goodwill
225,000
200,000 $ 25,000

Cost of Acquisition
Less Fair Value of INA Goodwill

Step 4

Acquirers Entries at Date of Acquisition

Tonga Limited receives shares

Dr Shares in Nuku Limited Cr Cash 225,000 225,000

Goodwill to be recognised as part of elimination entry

Assumptions
This week, we will work with the following assumptions Consolidation occurs at time of acquisition Only 1 Subsidiary in the Group Parent owns 100% of shares in Subsidiary

We will introduce more advanced issues later

Learning Objective 5

5. Elimination Entries
What is an elimination entry?

Illustration
Consider a family of 3 Father (employed as a manager) Weekly take-home pay of $500 Mother (sells food parcels from home) Collects an average of $100/week Receives $150/week from husband for housekeeping 1 child, Mere (full-time student) Receives $25/week as pocket-money from her parents Receives $15/week as allowance from her sponsor

Illustration
Calculate how much each family member receives in a week
Family Member Father Mother Mere 100 + 150 = 25 + 15 = Amount 500 250 40

Illustration
Calculate how much the family receives in a week
Family Member Amount

Father
Mother Mere Total 100 + 150 150 = 25 + 15 25 =

500
100 15 $615

We must exclude or eliminate transactions within the family

JOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752 0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.