Lecture notes on Consolidated accounts or Group Accounts. They have illustrations, are brief and simple to understand. Excellent for revision and quick review for CPA, B.Com, Finance and Accounting students.
Financial Statements :Nature, uses and limitations. Analysis and interpretations – meaning, procedure, objectives, and importance. Comparative statement, Common Size Statements and Trend Analysis - practical problems. Comparative financial statements are prepared by arranging financial data of two or more financial years in two side by side column.
Any financial statement that reports and comparison of data of two or more consecutive accounting periods are known as comparative financial statements.
Income statement or profit and loss account.
IFRS 10 set the rules and principles for preparing Consolidated Financial Statements when an entity owns one or more other entities. It also includes the history and background of the IFRS 10 that how it came into existence.
Accounting and Income tax aspects : Merger/AmalgamationHU Consultancy
Here we are trying to list the taxation and accounting implications for a typically Merger/Amalgamation of companies.
We also look at various methods for accounting to treat different types of merger
Magic Blades stock has risen rapidly to $50 per share. Th.docxsmile790243
Magic Blade's stock has risen rapidly to $50 per share. The increase is due to excitement about its new knife
that uses a light beam to slice fruits and vegetables. This process enhances the final appearance and quality
of salads and fruit trays.
The board of directors is considering strategies to divide the corporate ownership into more shares of stock,
and bring about some reduction in the price per share. They are considering a stock split, small stock dividend,
or large stock dividend. The board is unsure of the accounting effects of such transactions, and has requested
information about how stockholders' equity would be impacted.
Prior to the contemplated stock transaction, equity consisted of:
Stockholders’ Equity
Common stock, $2 par value, 2,000,000 shares authorized,
500,000 shares issued and outstanding $1,000,000
Paid-in capital in excess of par 2,000,000
Retained earnings 6,000,000
Total stockholders’ equity $9,000,000
(a) Assuming the board were to declare a 2 for 1 split, how would the revised stockholders' equity
appear?
(b) Assuming the board were to declare a 15% stock dividend, how would the revised stockholders'
equity appear?
B-14.07 Stock dividends and splits
x
SPREADSHEET
TOOL:
Holding a
cell reference
constant
Mike
Highlight
Summary information for Branford Corporation's balance sheet follows:
BRANFORD CORPORATION
Balance Sheet
August 15, 20X4
Assets
Cash $ 125,000
Accounts receivable 250,000
Inventory 750,000
Property, plant, & equipment (net) 860,000
Total assets $1,985,000
Liabilities
Accounts payable $125,000
Accrued liabilities 260,000
Notes payable 290,000
Total liabilities $ 675,000
Stockholders’ equity
Common stock, $5 par $700,000
Paid-in capital in excess of par 300,000
Retained earnings 310,000
Total stockholders’ equity 1,310,000
Total liabilities and equity $1,985,000
Branford's business is growing rapidly, and the company needs to expand its manufacturing facilities. This
expansion will require the company to obtain an additional $1,000,000 in cash. The company is exploring
five alternatives to obtain the necessary capital:
Equity structure and impact I-14.01
Mike
Highlight
366 | CHAPTER 14
DEBT OPTION:
Branford is able to borrow, on a 5-year note, the full amount needed. The interest rate on
this note would be 7%, and the note would require monthly payments.
COMMON STOCK OPTION:
Branford has identified an investor who is willing to pay $1,000,000 for 40,000 newly is-
sued common shares. Common shares have been paying a dividend of $0.50 per share.
Branford anticipates that this dividend rate will be maintained.
NONCUMULATIVE PREFERRED STOCK OPTION:
Branford has identified a hedge fund that will pay $1,000,000 for 8% noncumulative
preferred stock to be issued at par.
CUMULATIVE PREFERRED STOCK OPTION:
Branford has identified an insurance company that will pay $1,000,000 for 6% cumulative
preferred ...
Financial Statements :Nature, uses and limitations. Analysis and interpretations – meaning, procedure, objectives, and importance. Comparative statement, Common Size Statements and Trend Analysis - practical problems. Comparative financial statements are prepared by arranging financial data of two or more financial years in two side by side column.
Any financial statement that reports and comparison of data of two or more consecutive accounting periods are known as comparative financial statements.
Income statement or profit and loss account.
IFRS 10 set the rules and principles for preparing Consolidated Financial Statements when an entity owns one or more other entities. It also includes the history and background of the IFRS 10 that how it came into existence.
Accounting and Income tax aspects : Merger/AmalgamationHU Consultancy
Here we are trying to list the taxation and accounting implications for a typically Merger/Amalgamation of companies.
We also look at various methods for accounting to treat different types of merger
Magic Blades stock has risen rapidly to $50 per share. Th.docxsmile790243
Magic Blade's stock has risen rapidly to $50 per share. The increase is due to excitement about its new knife
that uses a light beam to slice fruits and vegetables. This process enhances the final appearance and quality
of salads and fruit trays.
The board of directors is considering strategies to divide the corporate ownership into more shares of stock,
and bring about some reduction in the price per share. They are considering a stock split, small stock dividend,
or large stock dividend. The board is unsure of the accounting effects of such transactions, and has requested
information about how stockholders' equity would be impacted.
Prior to the contemplated stock transaction, equity consisted of:
Stockholders’ Equity
Common stock, $2 par value, 2,000,000 shares authorized,
500,000 shares issued and outstanding $1,000,000
Paid-in capital in excess of par 2,000,000
Retained earnings 6,000,000
Total stockholders’ equity $9,000,000
(a) Assuming the board were to declare a 2 for 1 split, how would the revised stockholders' equity
appear?
(b) Assuming the board were to declare a 15% stock dividend, how would the revised stockholders'
equity appear?
B-14.07 Stock dividends and splits
x
SPREADSHEET
TOOL:
Holding a
cell reference
constant
Mike
Highlight
Summary information for Branford Corporation's balance sheet follows:
BRANFORD CORPORATION
Balance Sheet
August 15, 20X4
Assets
Cash $ 125,000
Accounts receivable 250,000
Inventory 750,000
Property, plant, & equipment (net) 860,000
Total assets $1,985,000
Liabilities
Accounts payable $125,000
Accrued liabilities 260,000
Notes payable 290,000
Total liabilities $ 675,000
Stockholders’ equity
Common stock, $5 par $700,000
Paid-in capital in excess of par 300,000
Retained earnings 310,000
Total stockholders’ equity 1,310,000
Total liabilities and equity $1,985,000
Branford's business is growing rapidly, and the company needs to expand its manufacturing facilities. This
expansion will require the company to obtain an additional $1,000,000 in cash. The company is exploring
five alternatives to obtain the necessary capital:
Equity structure and impact I-14.01
Mike
Highlight
366 | CHAPTER 14
DEBT OPTION:
Branford is able to borrow, on a 5-year note, the full amount needed. The interest rate on
this note would be 7%, and the note would require monthly payments.
COMMON STOCK OPTION:
Branford has identified an investor who is willing to pay $1,000,000 for 40,000 newly is-
sued common shares. Common shares have been paying a dividend of $0.50 per share.
Branford anticipates that this dividend rate will be maintained.
NONCUMULATIVE PREFERRED STOCK OPTION:
Branford has identified a hedge fund that will pay $1,000,000 for 8% noncumulative
preferred stock to be issued at par.
CUMULATIVE PREFERRED STOCK OPTION:
Branford has identified an insurance company that will pay $1,000,000 for 6% cumulative
preferred ...
Holding Company, Consolidated Balance sheet proforma, Cost of control format, minority interest format, calculation of Capital & Revenue Profit with time ratio, share ratio - Exercises
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Reconstruction of Companies problem with answer is discussed in this PPt.
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1. The term “receivables” refers to cash to be paid to debtors. merchandise to be collected from individuals or companies. cash to be paid to creditors. amounts due from individuals or companies. 2. Three accounting issues associated with accounts receivable are depreciating, valuing, and collecting. depreciating, returns, and valuing. accrual, bad debts, and accelerating collections. recognizing, valuing, and accelerating collections. 3. When the allowance method is used to account for uncollectible
Explain the concept of financial leverage.
Discuss the alternative measures of financial leverage.
Understand the risk and return implications of financial leverage.
Analyse the combined effect of financial and operating leverage.
Highlight the difference between operating risk and financial risk.
Notes on partnership accounting excellent for CPAs, Accounting, Finance and students taking introductory accounting classes. Notes are brief, clear and simple to understand.
These lecture notes clearly explain the concept of shares in regards to Company Law. Excellent for revision and study for CPAs, Bcom or any students taking business related courses where business law is a course unit.
Company Valuation webinar series - Tuesday, 4 June 2024FelixPerez547899
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An introduction to the cryptocurrency investment platform Binance Savings.Any kyc Account
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Cracking the Workplace Discipline Code Main.pptxWorkforce Group
Cultivating and maintaining discipline within teams is a critical differentiator for successful organisations.
Forward-thinking leaders and business managers understand the impact that discipline has on organisational success. A disciplined workforce operates with clarity, focus, and a shared understanding of expectations, ultimately driving better results, optimising productivity, and facilitating seamless collaboration.
Although discipline is not a one-size-fits-all approach, it can help create a work environment that encourages personal growth and accountability rather than solely relying on punitive measures.
In this deck, you will learn the significance of workplace discipline for organisational success. You’ll also learn
• Four (4) workplace discipline methods you should consider
• The best and most practical approach to implementing workplace discipline.
• Three (3) key tips to maintain a disciplined workplace.
The world of search engine optimization (SEO) is buzzing with discussions after Google confirmed that around 2,500 leaked internal documents related to its Search feature are indeed authentic. The revelation has sparked significant concerns within the SEO community. The leaked documents were initially reported by SEO experts Rand Fishkin and Mike King, igniting widespread analysis and discourse. For More Info:- https://news.arihantwebtech.com/search-disrupted-googles-leaked-documents-rock-the-seo-world/
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challengesHolger Mueller
Holger Mueller of Constellation Research shares his key takeaways from SAP's Sapphire confernece, held in Orlando, June 3rd till 5th 2024, in the Orange Convention Center.
[Note: This is a partial preview. To download this presentation, visit:
https://www.oeconsulting.com.sg/training-presentations]
Sustainability has become an increasingly critical topic as the world recognizes the need to protect our planet and its resources for future generations. Sustainability means meeting our current needs without compromising the ability of future generations to meet theirs. It involves long-term planning and consideration of the consequences of our actions. The goal is to create strategies that ensure the long-term viability of People, Planet, and Profit.
Leading companies such as Nike, Toyota, and Siemens are prioritizing sustainable innovation in their business models, setting an example for others to follow. In this Sustainability training presentation, you will learn key concepts, principles, and practices of sustainability applicable across industries. This training aims to create awareness and educate employees, senior executives, consultants, and other key stakeholders, including investors, policymakers, and supply chain partners, on the importance and implementation of sustainability.
LEARNING OBJECTIVES
1. Develop a comprehensive understanding of the fundamental principles and concepts that form the foundation of sustainability within corporate environments.
2. Explore the sustainability implementation model, focusing on effective measures and reporting strategies to track and communicate sustainability efforts.
3. Identify and define best practices and critical success factors essential for achieving sustainability goals within organizations.
CONTENTS
1. Introduction and Key Concepts of Sustainability
2. Principles and Practices of Sustainability
3. Measures and Reporting in Sustainability
4. Sustainability Implementation & Best Practices
To download the complete presentation, visit: https://www.oeconsulting.com.sg/training-presentations
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This Digital Transformation and IT Strategy Toolkit was created by ex-McKinsey, Deloitte and BCG Management Consultants, after more than 5,000 hours of work. It is considered the world's best & most comprehensive Digital Transformation and IT Strategy Toolkit. It includes all the Frameworks, Best Practices & Templates required to successfully undertake the Digital Transformation of your organization and define a robust IT Strategy.
Editable Toolkit to help you reuse our content: 700 Powerpoint slides | 35 Excel sheets | 84 minutes of Video training
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What might I learn?
A way to engage all in creating Inclusive Excellence. Lessons from the US military and their parallels to the story of Harry Potter. How belt systems and CI teams can destroy inclusive practices. How leadership language invites people to the party. There are three things leaders can do to engage everyone every day: maximizing psychological safety to create environments where folks learn, contribute, and challenge the status quo.
Who might benefit? Anyone and everyone leading folks from the shop floor to top floor.
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Building Your Employer Brand with Social MediaLuanWise
Presented at The Global HR Summit, 6th June 2024
In this keynote, Luan Wise will provide invaluable insights to elevate your employer brand on social media platforms including LinkedIn, Facebook, Instagram, X (formerly Twitter) and TikTok. You'll learn how compelling content can authentically showcase your company culture, values, and employee experiences to support your talent acquisition and retention objectives. Additionally, you'll understand the power of employee advocacy to amplify reach and engagement – helping to position your organization as an employer of choice in today's competitive talent landscape.
1. 1
CONSOLIDATED ACCOUNTS/GROUP ACCOUNTS
CURRENT INTERNATIONAL ACCOUNTING STANDARDS (IAS) AND
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
The current list is as follows:
International Accounting standards Date of issue
IAS 1 (revised) Presentation of financial statements September 2007
IAS 2 Inventories December 2003
IAS 7 Statements of cash flows December 1992
IAS 8 Accounting policies, changes in accounting
estimates and errors
December 2003
IAS 10 Events after the reporting period December 1993
IAS 11 Construction contracts December 1993
IAS 12 Income taxes November 2000
IAS 16 Property, plant and equipment December 2003
IAS 17 Leases December 2003
IAS 18 Revenue December 1993
IAS 19 Employee benefits December 2004
IAS 20 Accounting for government grants and disclosure
of government assistance
January 1995
IAS 21 The effects of changes in foreign exchange rates December 2003
IAS 23 (revised) Borrowing costs January 2008
IAS 24 Related party disclosures December 2003
IAS 26 Accounting and reporting by retirement benefit
plans
January 1995
IAS 27 (revised) Consolidated and separate financial statements January 2008
IAS 28 Investments in associates December 2003
IAS 29 Financial reporting in hyperinflationary economies January 1995
IAS 30 Disclosure in the financial statements of bank and
similar financial institutions (not examinable)
January 1995
IAS 31 Interest in joint ventures December 2003
IAS 32 Financial instruments: presentation December 2003
IAS 33 Earnings per share December 2003
IAS 34 Interim financial reporting February 1998
IAS 36 Impairment of assets March 2004
IAS 37 Provisions, contingent liabilities and contingent
assets
September 1998
IAS 38 Intangible assets March 2004
IAS 39 Financial instruments: recognition and
measurements
December 2004
IAS 40 Investment property December 2003
IAS 41 Agriculture February 2001
2. 2
IFRS 1 First time adoption of International Financial
Reporting Standards
June 2003
IFRS 2 Share-based payment February 2004
IFRS 3 (revised) Business combinations January 2008
IFRS 4 Insurance contracts March 2004
IFRS 5 Non-current assets held for sale and discontinued
operations
March 2004
IFRS 6 Exploration for and evaluation of mineral resources December 2004
IFRS 7 Financial instruments: disclosures August 2005
IFRS 8 Operating segments November 2006
IAS and Company Act CAP 486 requires that where a company has controlling
interest in another then the holding company should prepare the following:
(i) Consolidate balance sheet
(ii) Consolidated profit and loss
(iii) Consolidated cash flow statement
(iv) Statement of changes in equity
(v) Statement of changes in retained earnings
(vi) Notes to the accounts
Parent
An entity that has one or more subsidiary.
Subsidiary
An entity that is controlled by another entity.
Group
A parent and all its subsidiaries
Multi-Company structure/Nature of Control:- They are 3 types of multi-company
structure.
1. Horizontal structure/Direct structure
Co. B
Co. C Holding Co. D
Company
Co. E
company B, C, D, E are called subsidiaries
3. 3
Holding company
Company A Co. B Co. C
Subsidiaries
2. Vertical/indirect structures
This is where the holding company (parent) owns indirect controlling interest in the
subsidiary. However, in vertical group, direct relationship will first occur before the
indirect relationship.
Co. A Holding/parent company
Co.B Subsidiary
Indirect Co.C Sub- subsidiary
relationship
Co. D Sub-sub-subsidiary
3. Mixed Groups
5
This is where a parent company owns control interest in at least one subsidiary.
Co.A – Holding company
Co, B - Subsidiary
Co. C - Subsidiary
FORMS OF INTEREST IN A COMPANY
% of Holding Nature of interest Results Relevant
IAS/IFRS
1% to 19%
20% to 49%
50%
51% to 100%
Growing interest
Significant influence
Joint control
Control
Investment
Associate
Joint venture
Subsidiary
-
28
31
IFRS 3
4. 4
Control
Power of one company to influence decision of another.
Power to govern financial and operating policies of an enterprise so as to obtain
benefits from these activities.
Also defined as a means that the holding company governs and directs its
activities and formulation of policies of another company.
IAS 27 states that control can ussually be assumed TO EXIST WHEN A PARENT
OWNS MORE THAN 50% OF THE VOTING POWERS . However control can
exist even when the parent owns only 50% of the voting power or less in the
following circumstances:
a) Agreement with other investors where total holding is more than 50%
b) Parent has powers to govern financial and operating policies of an entity by a
statute or agreement
c) Parent has powers to appoint or remove majority memebres of BOD
d) Parent has majority votes at the meetings of BOD
Significant influence
This means that a company does not control the operating and financial policies of the
other, but participates in formulation of policies.
NB: Each individual company in the group is a separate legal entity and should
prepare its accounts and submit them to its shareholders. The holding company
however must prepare in addition to its account the consolidated accounts.
Consolidated Balance sheet (C.B.S)
Computation of % of holding
Percentage of Holding = shares purchased by the holding company x 100
Total shares of the subsidiary
Illustration One
Achievers limited purchased 500,000 shares of KCB on 1 January 2006. The total
shares in KCB as at that date were 800,000.
Required:
(i) Percentage of holding
(ii) Define the results
Illustration Two
Uchumi Limited purchased 200,000 shares of Kenya Airways Limited on 1 January
2004 cum-div. KA has a share capital of Ksh.1.5 million each share at a par value of
sh.5 and market price is sh.10.
Required:
Calculate the percentage of holding.
MINORITY INTEREST
This is the part of the company’s equity/net assets which is not owned directly or
indirectly by the holding company.
Illustration Three
NBK Limited has invested in Kenya Limited and the total investment amounts to
Ksh.6 million. The share capital of Kenya Limited is made up of 400,000 ordinary
shares of sh.20 each. There are no calls in arrears.
5. 5
Required:
(i) Percentage of holding and define the result.
(ii) Minority interest if any
Illustration Four
Tausi Limited has investment in Uchumi Limited amounting to sh.600,000. the share
capital of Tausi Limited is made of 100,000 ordinary shares of sh.20 each and that of
Uchumi Limited is made up of 40,000 ordinary shares of sh.20 each.
Required;
(i) Percentage of holding
(ii) Minority interest.
Illustration Five
Majani Mingi limited purchased 100,000 shares of K.K limited on 1 January 2005.
the capital base of K.K Limited is made up of 100,000 ordinary shares of sh.20 each.
Majani Mingi limited has a capital base of 150,000 ordinary shares of sh.50 each.
Required:
(i) Percentage of holding
(ii) Minority interest
Illustration Six
The following Balance Sheet extracts are provided:
Balance sheet extract
Assets Co.H Co.S
Investment in Co.S 100,000 --
(30,000 ordinary shares)
Capital Co. H Co. S
Ordinary shares 1,000,000 800,000
The ordinary shares of both companies are of sh.20 each.
Required:
(i) Percentage of holding
(ii) Minority interest.
r
BEFORE PREPARING CBS, THE FOLLOWING LEDGER ACCOUNTS
MUST BE OPENED AS PART OF THE WORKINGS.
1. Cost of Control account(COC)
This is prepared to determine positive or negative goodwill. The cost of investment
in the subsidiary is compared with the book value of assets acquired and the
difference between the two sides is the goodwill.
Positive goodwill: This arises when the consideration paid is more than the book
value of the assets acquired.
Provision of IFRS 3 regarding positive goodwill
The positive goodwill should be shown in full in the balance sheet without any
amortization. However, if the management feels there is loss of value of goodwill
(impairment) the following journal entry should be passed
Dr: Group profit and loss xxx
Cr: Cost of control account xxx – with the impairment loss
Negative goodwill – Arises when the assets acquired a higher than the consideration
paid.
6. 6
Provision of IFRS 3 regarding negative goodwill
Negative goodwill should be recognised as an income immediately. In this are:
Dr: Cost of control xxx
Cr: Group profit and loss xxx – with full amount of negative goodwill
NB: No goodwill will appear in the CBS.
Cost of control account
Cost of investment/purchase
consideration:
Ordinary shares xxx
Preference shares xxx
Debentures xxx
Negative goodwill xxx
xxx
value of assets acquired
Percentage holding x ordinary share capital xxx
Percentage holding x preference share capital xxx
Percentage holding x pre-acquisition profit xxx
Percentage holding x Debentures xxx
Percentage holding x pre acqui capital reserves xxx
Positive goodwill xxx
xxx
xxx
Pre-Acquisition profits
These are profits which were in existence at the time of acquiring the subsidiary.
Post-Acquisition profits
These are profits earned after the date of acquisition.
2. MINORITY INTEREST
The minority will share the financed by part of the balance sheet.
Minority Interest Account
CBS xxx
(balancing figure) ___
xxx
Percentage of ordinary share capital xxx
Percentage of Reserves xxx
Percentage share of preference share capital xxx
xxx
NB: Minority interest is based on current share of reserves whether pre or post.
3. GROUP PROFIT AND LOSS/GROUP RETAINED EARNINGS ACCOUNT
This account aggregates the various balances of retained earnings from members of
the group.
Group profit and loss
C.O.C xxx
Minority interest (M.I) xxx
Goodwill Amortised xxx
Pre-acquisition dividends xxx
C.B.S xxx
xxx
Balance brought down (profit): holding company xxx
Subsidiary xxx
___
xxx
CAPITAL RESERVES ACCOUNT
C.O.C xxx
M.I xxx
CBS xxx
xxx
Balance brought down: holding company xxx
subsidiary xxx
____
xxx
7. 7
Proposed dividend account (Subsidiary)
Dividend receivable xxx
(% holding x Proposed
dividend of subsidiary)
Due to minority xxx
(% holding x proposed
dividend of subsidiary) ___
xxx
Balance brought down (subsidiary) xxx
xxx
NB:
The share of dividends attributable to the minority should be shown as a current
liability in the balance sheet.
Proposed dividends of the holding company are shown in the C.B.S as a current
liability.
OTHER INTER-GROUP BALANCES
Such balances are to be eliminated from the C.B.S but before elimination, the amount
should be made equal.
Illustration Seven
The following balances of company A and B are presented as at 31 December 2005.
Details:
Land and building
Share in B (400,000 ordinary shares at cost)
Current assets
Stock
Debtors
Dividend due (company B)
Other receivables (company A)
Cash
Financed by:
Ordinary shares of sh.10 each
Capital reserves
Revenue reserves
Current liabilities
Owed to company B
Creditors
Proposed dividends
Company A
(000)
10,000
6,000
600
3,200
800
____
400
21,000
9,000
2,400
6,000
1,600
2,000
_____
21,000
Company B
(000)
8,000
1,600
1,400
-
2,000
_____
13,000
5,000
1,000
4,600
-
1,400
1,000
13,000
Additional information:
1. The shares in company B were acquired by company A on 1 January 2004 when
the revenue reserves of company B were sh.1.2 million. The other balances were
as they are now.
2. Goods invoiced in transit from company B to company A on 31 December 2005
amounted to sh.400, 000.
Required:
Consolidated balance sheet.
INTER-GROUP/INTER-COMPANY SALE OF STOCK
8. 8
The holding company as part of its normal operations may sell inventory to a
subsidiary at a profit or the subsidiary may sell to the holding company. If all the
goods sold by either party are sold by the end of the year, no adjustment is made.
However, if all or part of the stock remains unsold at the year end, an adjustment
must be made to remove the unrealized profit.
Holding company sells goods to the subsidiary
Holding company sells goods to subsidiary
First, determine the unrealized profit on closing stock with the unrealized profit
Dr: Group profit and loss xxx
Cr : Stock account xx – with the unrealized profit
NB: unrealized profit is assessed on the seller (i.e. holding company in this case).
Subsidiary company sells good to the holding company
Holding company subsidiary company
Dr: Group profit and loss (percentage share) xxx
Dr: Minority Interest (percentage share) xxx
Cr: Stock account (total unrealized profit) xxx
Illustration Eight
A holding company with 85% control in the subsidiary buys goods from the
subsidiary amounting to sh.5 million with a 30% mark up. The holding company sold
all the goods.
Required:
Show the journal entries to record the unrealized profit
Illustration Nine
Achievers limited own 75% of share capital of Tusker Limited during the year ended
31 December 2006. Achievers should stock to Tusker amounting to sh.2.5 million
with a mark-up of 25%. Show the accounting for unrealized profit if 60% of the
stock remained unsold.
INTER-GROUP SALE OF FIXED ASSETS
A company in a group may on occasion wish to transfer to a fixed asset and recognise
that transfer as a sale between unrelated parties. On consolidation the usual group
entity principle applies. The balance sheet must show assets at their cost and any
depreciation charged based on that cost. The adjustments made are the reduction of
unrealized profit made by the seller and depreciation overcharge made by the buyer.
Accounting treatment
1. Holding company selling its assets to subsidiary
a) Unrealized profit
Dr: Group profit and loss
Cr: Fixed asset account
b) Depreciation overcharge
Dr: Fixed asset account
Cr: Group profit and loss
Cr: Minority interest
2. Subsidiary selling its assets to holding company
a. Unrealized profit
9. 9
Dr: Group profit and loss
Dr: Minority interest
Cr: Fixed asset account
b. Depreciation overcharge
Dr: Fixed assets
Cr: Group profit and loss
Illustration Ten
ABC Limited controls 75% of the shares in XYZ Limited. ABC Limited sold a fixed
asset to XYZ Limited for sh.21 million where the cost price of the fixed asset to ABC
Limited was 16 million. The group policy is to depreciate fixed assets over 10 years
on straight line basis. Show the accounting entries.
Adjustment of Subsidiary assets to reflect their fair value (revaluation of assets)
On acquisition of subsidiary the holding company may with to revalue subsidiary
assets to reflect their fair value. The revalued amount may or may not be
incorporated by the subsidiary company in its own books.
Methods applicable
1) Bench-mark Approach
This approach is applied where the subsidiary has incorporated the revaluation made
by holding company. The total loss or profit is shown in the revaluation account with
a transfer made to the C.O.C. (representing the share of profit/loss on revaluation) for
the holding company and another transfer to the minority.
2) Alternative method/Approach/Treatment
It is applied when revaluations are not incorporated in subsidiary book. The assets of
subsidiary are adjusted onto to the extent of the holding company share of
revaluation. With a corresponding entry in the revaluation reserve which is then
closed with C.O.C.
Illustration Eleven
Unga Limited acquired 75% shares in Uchumi limited on 1 January 2006. Unga
Limited decided to revalue the assets of Uchumi limited as follows:
Assets book value fixed value
Equipment 200,000 240,000
Inventory 140,000 130,000
Patents 60,000 90,000
Required:
Adjust using the two methods.
PIECEMEAL ACQUISITION OF SUBSIDIARY
The holding company may acquire shares of a subsidiary which eventually leads to
the control of the subsidiary. The issue that arises in piecemeal acquisition is
determination of the amount of reserves to the capitalized i.e. taken to the C.O.C. are
the reserves at the date of acquisition or are they subsequent reserves which are going
to be capitalized at every stage of acquisition.
There are two approaches which are applied
1. Capitalization of reserves at the date when control if acquired
(conventions/basis)
10. 10
Under this approach reserves to be capitalized are those existing at the date when
control was acquired. The reserves are capitalized using the holding percentage
regardless of the date that makes up the holding percentage.
2. Step by step (capitalization approach)
The reserves to be capitalized are those existing at each date of purchase ie for each
purchase capitalization is done.
Choice of approach
Where the intention of the holding company is to acquire control of the subsidiary
and hold the shares over a short period. The step by step approach is recommended.
Illustration Twelve
ABC Limited gained control of XYZ Limited in 2004. it acquired 60% of the share
holding as follows:
January 2002 25%
January 2003 20%
January 2004 15%
60%
The profit/reserves of XYZ limited were as follows:
31 December 2001 300,000
31 December 2002 900,000
31 December 2003 1,200,000
31 December 2004 1,460,000
Required:
a) Compute the minority interest, post-acquisition profit and pre-acquisition profit
using the conventional method.
b) Compute as per the above using step by step Approach.
c) State in what situation the step by step approach is applicable.
d) Outline any consideration that ABC limited would consider in deciding which
approach to adopt.
e) State factors that might influence ABC limited to acquire shares of XYZ Limited
on a piecemeal basis.
INTRODUCING NON-SUBSIDIARIES INTO CONSOLIDATED BANK
STATEMENT
Associates – IAS 28 (20 – 49%)
Company A (holding company
80% 40%
Company B Company C (associate)
(Subsidiary)
An associate is an enterprise in which the investor has significant influence which is
neither a subsidiary not a joint-venture. The limit of holding is 20%-49%. There are
two methods applied when accounting for the associate.
(i) Equity method
Investment in associate is first recorded at cost and thereafter adjusted to the post
acquisition results of the associate.
NB: An associate must be accounted for using the equity method in the consolidated
accounts.
11. 11
(ii) Cost method
Under this method the investment in associate is recorded at cost. This method is
applied when:
The investment is acquired and held exclusively with a view of its subsequent
disposal in the near future.
The associate operates under several long term restrictions that makes it difficult for
the investor to expropriate profits.
COMPUTATION OF PREMIUM
Cost of investment xxx
Assets acquired
Percentage of ordinary share capital xxx
Percentage of share premium xxx
Percentage of pre-acquisition capital reserves xxx
Percentage of share pre-acquisition revenue reserves (profits) xxx
Percentage of pre-acquisition dividends xxx xxx
Premium xxx
Premium amortised:
Dr: Group profit and loss xxx
Cr: Investment in associate account xxx
Investment in associate account
Cost of investment xxx
Post-acquisition profit (% share) xxx
Post-acquisition reserve (% share) xxx
Foreign exchange profit (% share) xxx
___
xxx
Premium amortised xxx
Pre-acquisition dividend (% share) xxx
Unrealized profit xxx
Consolidated bank statement xxx
(balancing figure) xxx
Illustration Thirteen
Alfred Company bought a 25% shareholding on 31 December 2008 in Grimbald
Company at a cost of sh.38, 000. During the year to 31 December 2009 Grimbald
Company made a profit before tax of sh.82, 000 and the taxation charge on the year’s
profits was sh.32, 000. a dividend of sh.20,000 was paid on 31 December out of these
profits.
Calculate the entries for the associate which would appear in the consolidated
accounts of the Alfred group, in accordance with the requirements of IAS 28.
NB:
The only item posted to the consolidated bank statement in respect of the associate is
the balancing figure of investment in associate account which is recorded as a non-
current asset. Therefore, the assets, liabilities and capital of the associate must be
ignored in the consolidated bank statement.
Illustration Fourteen
The statements of financial position of J Company and its investee companies, P
Company and S company, at 31 December 2005 are shown below:
Statements of financial position as at 31 December 2005
J company P company S company
12. 12
sh.’000’ Sh.’000’ Sh.’000’
Non-current assets
Freehold property
Plant and machinery
Investments
Current assets
Inventory
Trade receivables
Cash
Total assets
Equity and liabilities
Equity
Share capital – sh.1 shares
Retained earnings
Non-current liabilities
12% loan stock
Current liabilities
Trade payables
Bank overdraft
Total equity and liabilities
1,950
795
1,500
4,245
575
330
50
955
5,200
2,000
1,460
3,460
500
680
560
1,240
5,200
1,250
375
-
1,625
300
290
120
710
2,335
1,000
885
1,885
100
350
-
350
2,335
500
285
-
785
265
370
20
655
1,440
750
390
1,140
300
___-
300
1,440
Additional information:
a) J Company acquired 600,000 ordinary shares in P Company on 1 January 2000
for sh.1, 000,000 when the retained earnings of P Company were sh.200, 000.
b) At the date of acquisition of P Company, the fair value of its freehold property
was considered to be sh.400, 000 greater than its value in P Company’s statement
of financial position. P Company had acquired the property in January 2000 and
the building element (comprising 50% of the total value) is depreciated on cost
over 50 years.
c) J Company acquired 225,000 ordinary shares in S company on 1 January 2004 for
sh.500, 000 when the retained earnings of S company were sh.150, 000.
d) P Company manufactures a component used by both J Company and S company.
Transfers are made by P Company at cost plus 25%. J company held sh.100,000
inventory of these components at 31 December 2005 and S company held
sh.80,000 at the same date.
e) The goodwill in P Company is impaired and should be fully written off. An
impairment loss of sh.92, 000 is to be recognized on the investment in S
company.
Required:
Prepare, in a format suitable for inclusion in the annual report of the J Group, the
consolidated statement of financial position at 31 December 2005.
Illustration Fifteen
A limited acquired the shares of B limited on 1 January 2000 when the reserves of B
limited stood at sh.40, 000. B limited on the same day acquired the shares in C
limited when the reserves of C limited stood at sh.50, 000.
The following balance sheets are presented as at 31 December 2000:
13. 13
Details Company A
Sh.’000’
Company B
Sh.’000’
Company C
Sh.’000’
Fixed assets
Investment at cost
(80,000 shares in company B)
60,000 shares in company C
Current assets
Ordinary share capital of sh.1
Retained earnings
105
120
-
50
275
80
195
275
125
-
110
35
270
100
170
270
180
-
-
35
215
100
115
215
Required:
Consolidated balance sheet
1) INVESTMENT
Dividend receivable from investment is the only item included in the consolidated
profit and loss account.
14. 14
CONSOLIDATED PROFIT AND LOSS
In consolidated profit and loss, the subsidiary results are included from turnover to
the profits after tax without distinguishing the share of the holding company with that
of the minority interest. An adjustment is then made to deduct the minority interest
share of the profit after tax.
The following must be eliminated when preparing consolidated profit and loss:
(i) Intergroup sales and purchases
(ii) Unrealized profit on sales and purchase of fixed assets
(iii) Unrealized profit on stock
(iv) Intergroup interest received and paid
(v) Intergroup dividend paid and received
Computation of minority interest
Percentage of preference dividend xxx
Percentage share of profit after tax and preference dividend of the subsidiary xxx
STATEMENT OF RETAINED EARNINGS
Retained earnings brought down (holding company) xxx
Profit for the year (holding company) xxx
Percentage share of preference dividend xxx
Percentage share of ordinary dividend xxx
Percentage share of subsidiary profit after tax and dividends xxx
(both preference and ordinary) ___
Retained profit carried down xxx
Illustration Sixteen
S. limited has 100,000 8% sh.100 preference shares and 100,000 sh.100 ordinary
shares. On 1 July 2000, H. limited acquired 30,000 of the preference shares and
75,000 of the ordinary shares. The profit and loss of the two companies for the year
ended 30 June 2007 is as follows:
Details Company H
Sh.’000’
Company S
Sh.’000’
Turnover
Cost of sales
Administration expenses
Net profit before tax
Tax
Net profit after tax
Proposed dividend
Preference
Ordinary
Retained earnings for the year
Retained earning brought down
200,000
(90,000)
110,000
(35,000)
75,000
(23,000)
5,200
-
(14,000)
38,000
79,000
117,000
98,000
(40,000)
58,000
(19,000)
39,000
(18,000)
21,000
(600)
(2,000)
18,400
23,000
41,400
Required:
Prepare consolidated profit and loss account.
15. 15
ACQUISITION OF A SUBSIDIARY AT MID-YEAR
When the subsidiary is acquired at the middle of the year, it is necessary to apportion
profits between pre and post acquisition period. There are two methods used when
preparing profit and loss account:
1. Whole year approach
Here, the turnover up to the profit after tax are added to that of the subsidiary. An
adjustment is then made from the profit after tax to remove pre-acquisition profits.
2. Part year approach
The entire profit and loss of the subsidiary is split between pre and post acquisition
period. Only post acquisition results of the subsidiary are included in consolidated
profit and loss account.
NB: The latter approach is recommended.
Illustration Seventeen
Assuming the facts of the previous example, prepare consolidated profit and loss
account if H. limited acquired the shares of S. limited on 1 January 2001 using both
methods.
INCORPORATING NON-SUBSIDIARY IN THE CONSOLIDATED PROFIT
AND LOSS ACCOUNT
2) ASSOCIATE
The associate is accounted for using the equity method recommended by IAS 28.
There are only two items of the associate incorporated in the consolidated profit and
loss account
a) Percentage share of associate before tax
b) Percentage share of associate tax
NB: the sales cost of sales and expenses of the associate are not included in the
consolidated profit and loss account.
s
BUSINESS COMBINATIONS
This is the bringing together of two different enterprises into one company or entity.
One enterprise obtaining control over the net assets of the other it can occur in two
ways.
1. Acquisition
2. Uniting of interest
1. ACQUISITION
This is a business combination where one of the companies (Acquires) obtains
control over the net assets and operations of another company.(Acquiree)
2. UNITING OF INTEREST (MERGER)
This is a business combination where the shareholders of combining enterprises
Combine control of the net assets and operations to achieve mutual sharing of risks
and benefits in respect of the lieu entity.
There are two accounting approaches applied in business combinations:
16. 16
1. Merger/pooling of interest / Uniting of Interest
Under this approach neither of the Companies can be identified as the acquirer or
acquiree.
Features
1. Shareholders of the enterprises must achieve a continuing mutual sharing
2. The basis of the transaction must be principles as exchange of shares
3. Net assets of the two companies are combined into one entity
4. The combination should result from an offer to the holder of voting shares
which are not already held by the offeror company.
5. At least 90% of the consideration must be in shares issued by the offeror
6. The fair value of the net assets of the merging companies is almost equal i.e.
no revaluation of assets is done
1. CONSOLIDATION PROCEDURE
Merger A/C
Cost of Investment xxx % Share of offeree shares xxx
(Investment recorded at par value)
Merger Reserve xxx
Balance figure
N/B
The merger reserve is not amortized.
2. Group Reserves Account
The account is prepared without distinguishing the pre- and post acquisition
reserves.
3. Minority Interest
The account is prepared in the same manner but M.I must be 10% or less.
4. Assets & Liabilities
Individual assets and liabilities are added in the C.B S.
2. ACQUISITON
This is the opposite of merger and has the following features.
a) Revaluation of assets is done
b) Transactions are recorded at their fair value
c) C. O.C is prepared
Cost of Control Account
Cost of Investment xxx % share of acquiree shares xxx
( Investment recorded at market value) % share of pre-acquiree profits xxx
Good will
xxx Balance figure xxx
d. Group Reserves Account
The reserves must be distinguished as either post or pre
Differences between Merger and Acquisition
17. 17
Merger Acquisition
Larger consideration is in shares Consideration can be in shares
No valuation of assets Valuation is done
Shares issued to the offeree company are Shares are recorded at market value
Recorded at par
No acquirer no acquire There is acquirer and acquiree
All reserves are considered post Reserves are either pre or post
No goodwill is computed Goodwill is computed
No share premium is recognized Share premium is recognized
18. 18
CONSOLIDATED CASHFLOW STATEMENT (C. C. S)
Where a company has subsidiaries and associates a c.c.s should be prepared. The
same procedure is followed just like that of individual companies. However the
following information must be considered.
1. Minority Interest
The amount paid to the minority inform of dividends is shown as a financing
activity
in the consolidated cash flow statement
2. Extra-ordinary Item
These are items which occur on rare situations eg earthquake and expropriatiation
of assets
Expropriation- forceful takeover of company assets by the government
Any cash flow arising from these items should be classified under operating
activities
3. Investment in Associate
Dividend receivable from associate should be classified under investing activities
4. Sale and Purchase of Subsidiary
Sale proceeds as well as the purchase cost of the subsidiary should be recorded
under investing activities.
INDIRECT METHOD
Shs. Shs. Shs.
Net profit before Tax xxx
Adjustments
Depreciation Xxx
Goodwill amortization Xxx
Loss on sale of fixed assets Xxx
Profit on sale of fixed assets Xxx
Foreign exchange loss Xxx
Foreign exchange grain Xxx
Interest Exp Xxx
Interest income Xxx xxx
xxx
Operating Activities
Increase in current Assets xxx
Decrease on current assets xxx
Increase in current liabilities xxx
Decrease in current liabilities xxx
Less Taxation xxx
Net cash inflows/ outflows
from
Operating activities xxx
INVESTING ACTIVITIES
Purchase of F/A and
Investments
Sale of F/A and investments xxx
Dividends received from
associates
xxx
19. 19
Interest received xxx
Other dividend received Xxx
Net cash inflows/outflows
from investing activities
xxx
FINANCIAL ACTIVITIES
Increase in sales capital and
sales premium
Xxx
Redemption of sales capital
and loans
Xxx
Finance lease paid Xxx
Dividend paid to group
members
Xxx
Dividend paid to M.I Xxx
Net cash inflow/ outflow from
financing activities
xxx
xxx
Add: Cash in cash equivalents
at start of the year
xxx
Cash in cash equivalent at year
end
xxx
Direct Method
In this method the net profit before tax up to the operating activities is eliminated.
Instead, the cash receipts from customers and cash paid to employers and employees
is computed. Investing and financing activities part remains the same for both
methods.
N/B
Indirect method is applicable in all questions while the direct method is only applied
where the information on sales, purchases and expenses is given
sh sh sh Sh
Cash receipts from customers xxx
Less cash paid to suppliers and
employees
xxx
Extra-ordinary item net of tax xxx
xxx
Less tax paid xxx
Net cash inflow/ outflow from
operating activities
xxx
Investing activities- Remains the
same
Financing activities remains the
same
w-1 Cash receipts from customers w-2 Cash paid to
20. 20
suppliers &
creditors
Sales (credit) xxx Cost of sales
xxx
Debtors xxx Add –Admin exp
xxx
Cash receipts from customers xxx Selling &
distribution
expenses
xxx
Gain on sale of
fixed assets and
investments
Closing stock
xxx
Creditors bal b/d
xxx
Less
xxx
Opening stock
xxx
Creditors bal b/d
xxx
Goodwill
amortization xxx
Depreciation
xxx
Cash paid to
suppliers &
employees