2024 VI - 6 AGR Consolidation and IFRS 10 Group Accounting PDF

ACCOUNTABILITY GOVERNANCE AND REGULATION II IFRS-Consolidation accounting Chiara Saccon Venice 2024 6  Programme and study materials Accounting Regulation (slides and Leuz article) Consolidation according to theories (sli...

ACCOUNTABILITY GOVERNANCE AND REGULATION II IFRS-Consolidation accounting Chiara Saccon Venice 2024 6  Programme and study materials Accounting Regulation (slides and Leuz article) Consolidation according to theories (slides and exercises) TEXTBOOK: IFRS regulation – Chapter 2 IFRS: an overview IFRS Consolidation: when to consolidate – Chapter 4 Consolidated financial statements IFRS Consolidation: how to consolidate – Chapter 3 Meaning of consolidation – Chapter 5 Combining individual financial statem. – Chapter 6 More on consolidation accounting  Consolidation Accounting for Subsidiaries IFRS Regulation The importance of consolidated financial report is recognized in IFRS regulation According to IFRS every group of entities shall present the consolidated financial report IFRS 10 is the principal standard (part of a Consolidation Package: IFRS 10, 11 and 12 dated 2011) and deals with the situation in which the investor has control over the investee  IFRS Regulation Main accounting standards within IFRS dealing with the issue of consolidation are: IFRS 10 – Consolidated Financial Statements IFRS 3 – Business Combinations IAS 28 – Investments in Associates IFRS 11 – Joint arrangements IFRS 12 - Disclosure of Interests in Other Entities IAS 27 - Separate Financial Statements  Consolidation process Steps of the consolidation process (recall): 0. Identify the group 1. Collect the individual companies’ financial statements 2. Make them uniform (accounting period, accounting policies, reporting currency, layout) 3. Combine assets, liabilities, equity, income, expenses of the parent with those of its subsidiaries 4. Eliminate the carrying amount of the parent’s investment 5. Eliminate any intra-group assets, liabilities, equity, income, expenses 6. Calculate and allocate the group’s and non controlling interests’ results 7. Prepare consolidated financial statements  IFRS 10 - Accounting requirements General accounting requirements Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee A parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances IFRS 10 - Uniform accounting policies Uniform accounting policies If a member of the group uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to that group member’s financial statements in preparing the consolidated financial statements to ensure conformity with the group’s accounting policies IFRS 10 - Reporting date Reporting date The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall have the same reporting date. When the end of the reporting period of the parent is different from that of a subsidiary, the subsidiary prepares, for consolidation purposes, additional financial information as of the same date as the financial statements of the parent to enable the parent to consolidate the financial information of the subsidiary, unless it is impracticable to do so  IFRS 10 - Reporting date (Reporting date) If it is impracticable to do so, the parent shall consolidate the financial information of the subsidiary using the most recent financial statements of the subsidiary adjusted for the effects of significant transactions or events that occur between the date of those financial statements and the date of the consolidated financial statements. In any case, the difference between the date of the subsidiary’s financial statements and that of the consolidated financial statements shall be no more than three months, and the length of the reporting periods and any difference between the dates of the financial statements shall be the same from period to period  IFRS Pre-consolidation summary Pre-consolidation adjustments Form and content of financial statements (consistency to allow line-by-line aggregation) Closing date (interim reporting needed; 3 months difference allowed) Currency (current exchange rate method) Accounting principles and policies (adjustments to get consistency)  IFRS 10 - Consolidation procedures Consolidated financial statements: (a) combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries. (b) offset (eliminate) the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary (IFRS 3 explains how to account for any related goodwill). (c) eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group (profits or losses resulting from intragroup transactions that are recognized in assets, such as inventory and fixed assets, are eliminated in full)  IFRS Consolidation process Items combination (a) combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries Line by line consolidation 100% of items amount (even if the parent investment in subsidiary is lower than 100%) Non-controlling interests recognized separately  IFRS Consolidation process Elimination of the Investment (b) offset (eliminate) the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary (IFRS 3 explains how to account for any related goodwill) Acquisition method=all identifiable A & L of the subsidiaries must be recognised and measured at FV at the time of acquisition (also goodwill and other assets and liabilities previously not recognized, mainly other intangible assets), when control is gained  IFRS Consolidation process (Elimination of the Investment) Cost of the investment Revalued Equity (FV) – Cost>Rev. Equity  Goodwill (Asset, Impaiment test) – Cost Revalued Equity MOUSE balance sheet 2.700-2.400= 300 goodwill Tangible assets 1.500Liabilities 1.500 Intang. assets 2.000Equity 1.500 Tangible assets Retained earn 500 1.000+1.500+1.000rev=3.500 Deferr. taxes 500 (50% of 1.000) Consolidated balance sheet Liabilities Tangible assets 3.500Deferred taxes 500 3.100+1.500+200 rev=4.800 Deferred taxes 100Liabilities 4.800 Deferr. Taxes=100 (50% of 200) Intangib.assets 5.000Equity 3.000 Retain earnin Goodwill 300 600 Example 6.3 – Recognition of non-controlling interests at the acquisition date (pag. 159) Entity STAR acquires entity LIGHT by purchasing 60% of its equity for 300 million in cash. The fair value of the non-controlling interests is determined to be 200 million. While the net aggregate fair value of the identifiable assets and liabilities is 370 million. The company’s tax rate is on a 40% basis. Example 6.3 – Recognition of non-controlling interests at the acquisition date The key figures included in the Balance Sheet of entity LIGHT at the date of acquisition are summarized in the table below: Balance sheet LIGHT Assets 290 Liabilities 100 Equity 190 A Example 6.3 – Recognition of non-controlling interests at the acquisition date At the date of acquisition, the fair values for all assets and liabilities of LIGHT are equal to their book values, except for a parcel of land, a building and an internally generated trademark. The fair values of those assets are given in the following table: Book Fair 100% Value Value Building 50 140 Land Trademark 30 75 (Internally 90 255 generated) Total 170 470  Example 6.3 – Recognition of non-controlling interests at the acquisition date According to IFRS 3, Entity STAR has the option to account for non-controlling interests either at: i. fair value (i.e. using the full goodwill method) or ii.the non-controlling interests’ proportionate share of the acquiree’s identifiable net assets at fair value.  Full goodwill recognition If the company chooses to apply the full goodwill method, the non-controlling interests’ value is equal to their fair value. The resulting value is therefore 200 million. In such case, we calculate the total value of the company (as if 100% had been acquired at the acquisition date) which will be useful to calculate the full goodwill: Consideration paid by the parent company (60%) 300 Fair value of non controlling interests (40%) 200 Total value (100%) 500  Full goodwill recognition The total value of entity LIGHT can be broken down into the following components: + Book value of equity 190 A + Net surpluses on identifiable assets (net of tax effects) 180 B + Goodwill 130 = Total Value (100%) 500  Full goodwill recognition The calculation of the net surpluses on identifiable assets is summarized in the table below: Book Fair Tax Net 100% Diff Value Value effect Amounts Building 50 140 90 36 54 Land 30 75 45 18 27 Trademark (Internally generated) 90 255 165 66 99 Total 170 470 300 120 180 B  Full goodwill recognition Goodwill has been computed as: + Consideration paid (60% of subsidiary value) 300 + Fair value of the non-controlling interests (40%) 200 - Fair value of 100% of the identifiable net assets -370 = Goodwill recognized 130 190 (A) + 180 (B)= 370  Full goodwill recognition For the purpose of consolidation, the parent company would account for the elimination of the investment in LIGHT and for the different determinants of its value by making the following journal entries: Debit Credit Land (+A) 45 Building (+A) 90 Trademarks (+A) 165 Goodwill (+A) 13 Equity (-SE) 190 Investments (-A) 300 Deferred Tax Liabilities (+L) 120 Non-controlling Interests (+SE) 200  Full goodwill recognition Where:  Land, Building and Trademarks are increased by the surpluses arising from comparing the fair values of the assets to their carrying amounts, net of tax (Deferred Tax Liabilities)  Goodwill is determined as the difference between the value of the whole company (500) and the fair value of the company’s net assets (190 + 180)  Full goodwill recognition  Non-controlling interests are accounted for at their fair value, which indirectly is composed of: o the proportionate share of the book value of equity; o the proportionate share of the surpluses on the value of net assets, net of tax, and o the goodwill attributable to the non- controlling interests.  Full goodwill recognition Remember: Since the non-controlling interests are recorded at fair value, goodwill is effectively recognized for both the controlling and no- controlling interests (i.e. ‘fully’ recognized). Example 6.4 – Full goodwill recognition with non-controlling interests (pag. 165) On 1 January, company A buys 80% of shares in company B. The cost of the investment is 11,000. The book value of the equity of B at the same date is 10,000. The fair values of assets and liabilities of B equal their book values, except for the following: Book value Fair value Gross surplus Property 6.000 8.000 2.000 Patents 1.000 3.000 2.000 Example 6.4 – Full goodwill recognition with non-controlling interests (pag. 165) Consider that the tax rate applied by the two companies is 50%. We start by eliminating the investment in B in accordance with IFRS 3, recognizing the positive difference as goodwill. The company applies the full goodwill method. In this case, assume that the fair value of the non-controlling interests at the acquisition date is 2,750. Example 6.4 – Full goodwill recognition with non-controlling interests (pag. 165) Debit Credit B equity (-SE) 10.000 Property (+A) 2.000 Patents (+A) 2.000 Goodwill (+A) 1.750 Investments in B (-A) 11.000 Deferred Tax Liabilities (+L) 2.000 Minority Interests (+SE) 2.750 Example 6.4 – Full goodwill recognition with non-controlling interests (pag. 165) The consolidated balance sheet is built as follows: SFP A B Aggregate (1) Consol. ASSETS Non-current assets Property, plant and equipment 5.000 6.000 11.000 2.000 13.000 Patent and trademarks 2.000 4.000 6.000 2.000 8.000 Goodwill 1.750 1.750 Investments 11.000 11.000 -11.000 0 TOTAL ASSETS 18.000 10.000 28.000 -5.250 22.750 LIAB. And OWN. EQUITY Owners'equity Common stock 18.000 10.000 28.000 -10.000 18.000 Non-controlling interests 2.750 2.750 Deferred tax liabilities 2.000 2.000 TOTAL LIAB and EQUITY 18.000 10.000 28.000 -5.250 22.750  Example 6.4 – Full goodwill recognition with non-controlling interests (pag. 165) - Recognition of surpluses [4,000] on property and patents - Elimination of investment [11,000] and subsidiary’s equity [10,000] - Recognition of deferred tax liabilities [4,000*0.5=2,000] - Recognition of (full) goodwill [1,750]: 13,750 [consideration paid + fair value non-controlling interests] – 10,000 [BV equity] – net surplus value [2,000].  Example 6.5 – Proportionate recognition of goodwill with non-controlling interests (pag. 167) On Dec. 31, company A buys 90% of shares in company B. The cost of the investment is 2.100. The individual balance sheets of the two companies on the date of the acquisition are reported in the worksheet. Example 6.5 – Proportionate recognition of goodwill with non-controlling interests On the same date, the fair values of assets and liabilities of B equal their book values, except for patents, whose fair value is 400. Book value Fair value Gross surplus Patents 200 400 200 Example 6.5 – Proportionate recognition of goodwill with non-controlling interests The difference between the cost of the investment and the owners’ equity is recorded as goodwill. Consider that the tax rate applied by the two companies is 50%. Prepare the consolidated financial statement on the date of the acquisition in accordance with IFRS 3, assuming that the company recognizes only the goodwill acquired by the parent company. Example 6.5 – Proportionate recognition of goodwill with non-controlling interests We start eliminating the investment in B in accordance with IFRS 3. Remember that, in this case, we shall not consider the goodwill of the non-controlling interests. Debit Credit B equity (-SE) 1.500 B Retained Earnings (-SE) 500 Patents (+A) 200 Goodwill (+A) 210 Investments in B (-A) 2.100 Deferred Tax Liabilities (+L) 100 Non-controlling Interests (+SE) 210 Example 6.5 – Proportionate recognition of goodwill with non-controlling interests The consolidated balance sheet is built as follows: SFP A B Aggregate (1) Consol. ASSETS Non-current assets Goodwill 210 210 Investments 2.100 2.100 -2.100 0 Patents 200 200 200 400 Other assets 4.000 3.300 7.300 7.300 TOTAL ASSETS 6.100 3.500 9.600 -1.690 7.910 LIAB and EQUITY Owners'equity Common stock 3.000 1.500 4.500 -1.500 3.000 Retained earnings 600 500 1.100 -500 600 Non-controlling interests 210 210 Current and non current liabilities (including deferred tax liabilities) 2.500 1.500 4.000 100 4.100 TOTAL LIAB and EQUITY 6.100 3.500 9.600 -1.690 7.910 Example 6.5 – Proportionate recognition of goodwill with non-controlling interests Recognition of surplus on patents Elimination of investment [2.100] and subsidiary equity [1.500+500=2.000] Recognition of deferred tax liabilities [200*0,5=100] Recognition of goodwill =210=2.100 [consideration paid] – 90%*2.000 [equity B] – 100 [net surplus on patents].