Corporate Reporting & Group Accounting PDF 2024-2025

Corporate Reporting & Group Accounting 2024-2025 Amedeo Pugliese Marco Ghitti University of Padua University of Padua [email protected] [email protected]...

Corporate Reporting & Group Accounting 2024-2025 Amedeo Pugliese Marco Ghitti University of Padua University of Padua [email protected] [email protected] 1 Consolidation at the End of Year 1 2 Reporting controlling and NCIs after the initial recognition (Year 1) Accounting entries B @ FV B @ BV Ch (FV-BV) PPEs 600 500 100  Let’s imagine that A buys B and there is one change to the fair value revaluation due to the increase in value of PPEs from 500 to 600 (FV revaluation = + 100). The amortization rate is straightline over 5 years for both entities. Tax rate is 30%  PPEs of A are worth 1,000 and are amortized at 10% rate each year  Our focus and revaluation is on the following steps: 1. Recognition at the time of the purchase 2. Adjustments at the end of the first year after purchase 3. Adjustements at the end of any year after the purchase 3 Reporting effects of FV changes for CIs and NCIs Entity A = Parent Entity B = Subsidiary  At the acquisition date the BV of the PPE of B is 500 (amortization over 5 years)  At the acquisition date 1/1/200X the FV of the PPE is 600 (Difference FV 600 – BV 500 = 100)  What happens @ 31/12/200X? – Amortization in the IS of B = 100 500/5 – Amortization in the IS Consolidated = 120 600/5 – PPE in the BS of B = 400 500-100 – PPE in the BS Consolidated = 480 600-120 4 Reporting controlling and NCIs after the initial recognition 31-12-200x Acquisition date 1-1-200x 31-12-200x CFS Consolidated A B Δ FV A B Δ FV A+B+ΔFV PPE 1000 500 100 900 400 80 1,380 Amortization 100 100 20 220 Amortization 10% 20% 20% 10% 20% 20% rate Δ FV 100 / 5 years = 20% The accounting system allows to track A and B have their own accounts the value of PPE in the BS of A and B open at single assets and liabilities The FV does not exist in the accounting The FV has to be amortized in CFS system of A and B 5 Reporting controlling and NCIs after the initial recognition (Year 1) From the Subsidiary’s (B) perspective What is the value of the acquiree’s PPEs at BV? = 500 What is the amortization rate in the Sub’s BS? = 100 per year What is the residual value of PPEs in the Sub’s BS? = 400 What is the tax effect due to amortization? = 30 From the Parent’s (A) perspective What is the value of the acquiree’s PPEs at BV? = 600 What is the amortization rate in the Sub’s BS? = 120 per year What is the residual value of PPEs in the Sub’s BS? = 480 What would be the tax effect due to amortization? = 36 Note the differential taxes (36 vs 30) that disadvantages PARENT 6 Reporting controlling and NCIs after the initial recognition The excess AMORTIZATION for 20 each year has the following CONSEQUENCES: Higher COSTS in the consolidated IS Lower TAXES Lower EARNINGS (BOTH FOR CI AND NCI) Less DEFERRED TAX LIABILITIES (they reverse to offset higher taxes from the subsidiary) Lower EQUITY (BOTH FOR CI AND NCI) 7 Reporting controlling and NCIs after the initial recognition (Year 1) Consolidated 31-12-200x A B @ BV Ch (FV–BV) A+B+ΔFV PPE 900 400 80 1,380 Intangibles (not including GW) 0 0 0 0 Revenues 3,000 1,000 0 4,000 Operating costs 2,600 800 0 3,400 Depreciation & amortization 300 100 20 420 CONSIDERING ONLY THE PPE THE TOTAL AMORTIZATION IS 120 BUT 100 HAS BEEN ALREADY INCLUDED IN THE IS OF THE SUBSIDIARY AT THE END OF THE YEAR, AT THE CONSOLIDATED FIN STAT will increase AMORTIZATION by + 20 8 Reporting controlling and NCIs at the purchase (Year 1)  Let’s introduce a variation to the theme when NCIs are also present and Parent A buys 80% of Subsidiary B Parent A buys 80% of Subsidiary B Adjustments at FV PPE Acquisition date Year 1 Purchase A B Δ FV Dr Cr PPE 1000 500 100 100 80% of ΔFV Net of DTL Deferred tax 30 Equity (100-(100*30%))*80% Equity CI 56 Equity NCI 14 Income Statement Amortization 100 100 20 80% of ΔFV Net of DTL Amortization rate 10% 20% 20% Tax (100-(100*30%))*20% Earnings Earnings CI Earnings NCI 9 Reporting controlling and NCIs after the initial recognition (Year 1) Parent A buys 80% of Subsidiary B Adjustments at FV End of Year 1 Am. Δ FV PPE Year 1 PPE Purchase A B Δ FV Dr Cr Dr Cr PPE 900 400 80 100 20 Deferred tax 30 6 Equity Equity CI 56 11.2 Equity NCI 14 2.8 Income Statement Amortization 100 100 20 20 Tax 6 Earnings Earnings CI 11.2 14*80% Earnings NCI 2.8 14*20% BS Adjustments IS Adjustments 10 Reporting controlling and NCIs in Year 2 From the Subsidiary’s (B) perspective What is the value of the acquiree’s PPEs at BV? = 400 What is the amortization rate in the Sub’s BS? = 100 per year What is the residual value of PPEs in the Sub’s BS? = 300 What is the tax effect due to amortization? = 30 From the Parent’s (A) perspective What is the value of the acquiree’s PPEs at BV? = 480 What is the amortization rate in the Sub’s BS? = 120 per year What is the residual value of PPEs in the Sub’s BS? = 360 What would be the tax effect due to amortization? = 36 Note the differential taxes (36 vs 30) that disadvantages PARENT 11 Reporting controlling and NCIs after the initial recognition Adjustments to re-estimate the opening Parent A buys 80% of Subsidiary B CBS Adjustments at FV End of Year 2 Am. Δ FV PPE Year 1 Am. Δ FV PPE Year 2 PPE Purchase A B Δ FV Dr Cr Dr Cr Dr Cr PPE 800 300 60 100 20 20 Deferred tax 30 6 6 Equity Equity CI 56 11.2 11.2 Equity NCI 14 2.8 2.8 Income Statement Amortization 100 100 20 20 Tax 6 Earnings Earnings CI 11.2 Earnings NCI 2.8 Two years post acquisition the value of PPEs acquired should be 600 - 120 (amt yr1) - 120 (amt yr 2) = 360 12 Reporting controlling and NCIs in Year 3 From the Subsidiary’s (B) perspective What is the value of the acquiree’s PPEs at BV? = 300 What is the amortization rate in the Sub’s BS? = 100 per year What is the residual value of PPEs in the Sub’s BS? = 200 What is the tax effect due to amortization? = 30 From the Parent’s (A) perspective What is the value of the acquiree’s PPEs at BV? = 360 What is the amortization rate in the Sub’s BS? = 120 per year What is the residual value of PPEs in the Sub’s BS? = 240 What would be the tax effect due to amortization? = 36 Note the differential taxes (36 vs 30) that disadvantages PARENT 13 Reporting controlling and NCIs after the initial recognition Parent A buys 80% of Subsidiary B Adjustments to re-estimate the opening CBS Adjustments at FV Am. Δ FV PPE Year Am. Δ FV PPE Year Am. Δ FV PPE Year End of Year 3 PPE Purchase 1 2 3 A B Δ FV Dr Cr Dr Cr Dr Cr Dr Cr PPE 700 200 40 100 20 20 20 Deferred tax 30 6 6 6 Equity Equity CI 56 11.2 11.2 11.2 Equity NCI 14 2.8 2.8 2.8 Income Statement Amortization 100 100 20 Tax 6 Earnings Earnings CI 11.2 Earnings NCI 2.8 Three years post acquisition the value of PPEs acquired should be 600 - 120 (amt yr1) - 120 (amt yr 2) - 120 (amt yr 3) = 240 14 Reporting controlling and NCIs after the initial recognition The accounting system allows tracking the value of PPE in the BS of the parent and subsidiary At the end of each reporting date, the parent and the subsidiary close all accounts to BS and IS At the beginning of each year the parent and subsidiary re-open all accounts thus permitting to track values consistently over time But… while the parent and subsidiary’s BS are re-opened the CFS is not, therefore we need to re-start from separate BS of the parent and the subsidiary. As a consequence at the end of each reporting - First, there is the need to re-estimate the opening CBS - Second, there is the need to account for the changes have occurred during the reporting period 15