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Summary Business Accounting (BAC200) - Semester 2
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This document contains chapters from the textbooks: Introduction to Consolidations and Introduction to IFRS as well as lecture notes. It encompasses Learning Areas 11 - 17

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  • Introduction to consolidations: la 11 : chapter 1 - 6, introduction to ifrs: la 12 - 13: chapter 14,
  • January 27, 2022
  • 44
  • 2021/2022
  • Summary

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BAC 200 – Business Accounting


Contents
LA 11: Chapter 1: Business Combinations ............................................ 2
LA 11: Chapter 2: Wholly-owned subsidiary ........................................ 6
LA 11: Chapter 3: Partially-owned Subsidiary.................................... 11
LA 11: Chapter 4: General Intragroup Transactions ......................... 16
LA 11: Chapter 5: Intragroup Transactions: Inventories ...................19
LA 11: Chapter 6 (Consolidations): Intragroup Transactions: PPE .. 23
LA 12: Investments in Associates and Joint Ventures ....................... 24
LA 13: Events after reporting period (IAS 10) .....................................27
LA 14: Provisions, Contingent liabilities/ assets .................................. 29
LA 15: Chapter 11 (IFRS): Employee Benefits .....................................32
LA 16: Earnings per share (IAS 33) ....................................................... 36
LA 17: Chapter 12 (IFRS): Effects of changes in foreign exchange
rates: Unhedged Transactions ............................................................39
LA 17: Chapter 12 (IFRS): Effects of changes in foreign exchange
rates: Hedged Transactions ................................................................. 43




1

,LA 11: Chapter 1: Business Combinations

1. INTRODUCTION
Investment Reasons
in shares  realisation of short‐term capital gains
 earn dividend income
 gain control over net assets of another entity

Accounting dependent on
 expected holding period
- current: intent to dispose < 12 months
- non-current: intent to hold > 12 months
 purpose of investment
- active vs
- passive
Types of Minority Minority active Majority
investments passive active
(Business
combo)
Power over Little influence Significant Control
investee (small influence/ joint
ownership %) control
Influence on Minor Considerable Dictate
activities
affecting
returns
Controls Shares Participate in Business of
purchased financial/ investee
operating policy
decisions
Disclosed as Current/ non- Non-current asset Non-current
current asset asset
Business  transaction/ other event
combination  in which acquirer obtains control of business(es)

Parent Subsidiary
Group
Business P > 50% Business S P&S

Acquirer Acquiree


Business  integrated set of activities/ assets
 capable of being conducted/ managed
 for purpose of providing return
- dividends
- lower costs
- other economic benefits
 directly to investors/ other owners/ members/ participants
Operating  reduce legal/ operating risk
as separate  reduce cost of jurisdiction‐specific corporate/ tax laws

2

,legal entities  expand/ diversify
within a  reduce cost of divesting assets
group
Obtaining control – acquirer will be in position to govern
 financial policies
 operating policies

In substance
 businesses are combined to form single reporting entity
 each business is still a separate legal entity
Terminology IFRS 3 IFRS 10
Acquirer: obtains control Parent: controls entities
Acquiree: is controlled Subsidiary: controlled by entity
Group: acquirer + acquirees Group: parent + subsidiaries
Focuses on date of Addresses period since
acquisition acquisition


2. CONTROL
Definition  Investor is exposed/ has rights to
 variable returns from involvement with investee
 has ability to affect returns
 through power over investee


Exposure
Link
to Control
Power between
variability
them
in return



Power  Existing rights held by investor
- voting rights
- contractual rights
 Entity which holds less than 50% of voting rights may control
investee through contractual rights as power to
- govern policies through statute/ agreement
- hire/ fire majority of BoD
- cast more than 50% votes where BoD controls entity
Returns  In order to control investee, investor must have
 Exposure/ rights to variable returns from involvement
 Returns can be +/ -
 Can encompass a broad range of benefits/ detriments
Link  Investor must have ability to
between  Use its power to
 Affect its returns from involvement




3

,3. ACQUISITION METHOD
Requirements 1. Identifying acquirer
2. Determining acquisition date
3. Recognizing/ measuring
- identifiable assets
- liabilities assumed
- non-controlling interests
4. Recognising/ measuring
- Goodwill/
- Gain from bargain purchase
1. Entity
 that transfers cash/ other assets/ incurs liability
 that issues equity interests
 whose relative size is greater than other combining entity
 that initiated combination
2. Date that
 acquirer obtains control of acquiree
 acquiree’s assets/ liabilities will be included in acquirer’s
financial statements
 acquirer legally transfers consideration to previous owners
 unconditional offer is accepted
 acquirer commences direction of policies of acquiree
 flow of economic benefits of acquiree changes
 majority of BoD of acquiree represents interests of acquirer
 competition commission provides clearance for acquisition
3. Recognition criteria
Perspective of combined entity:
 meet definition of asset/ liability at acquisition date
 be part of business acquired rather than result of separate
transaction

Non-controlling interest
 equity in a subsidiary not attributable to a parent
Classification/ designation of identifiable assets/ liabilities
Based on
 contractual terms
 economic conditions
 operating/ accounting policies
 pertinent conditions
Measurement
 at acquisition-date fair values
4. Consideration transferred
 measured at fair value
 = fair values of assets transferred + liabilities incurred + equity
interests issued by acquirer


Goodwill:
 asset representing future economic benefit
 arising from other assets acquired in business combinations


4

,  not individually identified/ separately recognized
 results in consideration and NCI > net of fair values of
identifiable assets/ liabilities
 e.g., equity – asset = consideration
 non-current asset in consolidated SOFP

Gain from bargain purchase
 =(Assets + liabilities) – (consideration transferred + NCI)
 E.g. equity – profit = consideration


4. CONSOLIDATED FINANCIAL STATEMENTS
Definition  Financial statements of a group in which
 assets/ liabilities/ equity/ income/ expenses/ cash flow
 of parent and subsidiaries are presented
 as those of a single economic entity
Each entity  prepares its own financial statements
 keeps its own general ledger/ accounting records
 complies with own relevant laws/ regulations
Parent must  parent is wholly‐owned subsidiary of another entity/
present partially‐owned subsidiary where the other owners have
consolidated been informed that consolidated FS will not be presented
FS unless and they have not objected
 parent’s debt/ equity instruments are not publicly traded
 parent doesn’t file FS with regulatory organisation for
purpose of issuing any class of instruments in a public
market
 ultimate/ intermediate parent produces consolidated FS.




5

,LA 11: Chapter 2: Wholly-owned subsidiary

1. CONSOLIDATION OF WHOLLY-OWNED SUBSIDIARY
Process 1. Obtain the FS of both
2. Consider reporting dates/ accounting policies
3. Combine/ Add balances/ totals together
4. Consider assets/ liabilities are fairly valued
5. Eliminate P’s investment in S
 Dt Share Capital of S
 Dt Retained Earnings of S
 Ct Investment: S Ltd
6. Recognise the goodwill/ gain from a bargain purchase
Analysis of S ltd Total P Ltd NCI
Equity At Since
(100%)
At acquisition
Share capital X X
Retained earnings X X
Total equity X X
Goodwill/ (GFBP) X/(X) X/(X)
Consideration + NCI X X

Since Acquisition
To beginning of current reporting
period
Retained Earnings* X
Current reporting period
Profit for the Year* X X

Total Equity X X X

* Opening balance S – Consolidation Journal
** Revenue – COS + Other Income – Other Expenses – Finance cost
Consolidate Assets
d statement Investment: S Ltd (Balance – Consolidation Journal) -
of Financial Goodwill X
Position Other assets (P + S) X
Total Assets X

Equity
Equity attributable to owners of parent:
Share capital (P + S – CJ) X
Revaluation Surplus
Retained earnings (P + S – CJ+ GFBP) X
Total Equity X
Example P Limited acquired a 100% interest on 1 January 20X9
P Ltd S Ltd
Assets
Investment: S Ltd (consideration paid at cost) 30 000 -

6

, Other assets 52 000 30 000
82 000 30 000
Equity
Share capital 45 000 22 500
Retained earnings 37 000 7 500
82 000 30 000

1. Combine balances and totals

2. At-acquisition consolidation journal
Net Asset Value = Equity
Share capital (was a Ct balance in S Ltd’s TB) 22 500
Retained earnings (was a Ct balance) 7 500
Investment: S Ltd (was a Dt balance) 30 000
Eliminated P’s investment in S

3. P Ltd
Consolidated Statement of financial position as at 1 Jan 20X9

4. Analysis of equity – S Ltd


2. AT-ACQUISITION CONSOLILDATION JOURNAL
1. Equity of P provides funds for investment in S
2. Cash transferred to S provides funds for assets S purchases
3. Equity of P represents funding of assets of S
4. If S traded before acquisition – it would’ve generated additional net assets
– P will have to pay for this


3. INTEREST ACQUIRED > NAV = GOODWILL
Why  Collection of net assets acquired able to earn higher rate of
return for acquirer
Example P Limited acquired a 100% interest on 1 January 20X9

P Ltd S Ltd
Assets
Investment: S Ltd (consideration paid at cost) 35 000 -
Other assets 52 000 30 000
87 000 30 000
Equity
Share capital 45 000 22 500
Retained earnings 42 000 7 500
87 000 30 000

1. Combine balances and totals

2. At-acquisition consolidation journal


7

, Share capital (was a Ct balance in S Ltd’s TB) 22 500
Retained earnings (was a Ct balance) 7 500
Goodwill 5 000
Investment: S Ltd (was a Dt balance) 35 000

3. P Ltd
Consolidated Statement of financial position as at 1 Jan 20X9

4. Analysis of equity – S Ltd


4. INTEREST ACQUIRED < NAV = GFBP
Why  Seller is acting under compulsion of forced sales
 Measurement errors in determining fair value
Example P Limited acquired a 100% interest on 1 January 20X9
P Ltd S Ltd
Assets
Investment: S Ltd (consideration paid at cost) 28 000 -
Other assets 52 000 30 000
80 000 30 000
Equity
Share capital 45 000 22 500
Retained earnings 35 000 7 500
80 000 30 000

1. Combine balances and totals

2. At-acquisition consolidation journal
Share capital (was a Ct balance in S Ltd’s TB) 22 500
Retained earnings (was a Ct balance) 7 500
Gain from bargain purchase 2 000
Investment: S Ltd (was a Dt balance) 28 000

3. P Ltd
Consolidated Statement of financial position as at 1 Jan 20X9

4. Analysis of equity – S Ltd


5. CONSOLIDATION SUBSEQUENT TO ACQUISITION
Example P Limited acquired a 100% interest on 1 January 20X9
P Ltd S Ltd
Assets
Investment: S Ltd 35 000 -
Other assets 62 000 30 000
97 000 30 000
Equity
Share capital 45 000 22 500


8

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