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Business Combination IFRS 3

The document provides an overview of subsidiaries and consolidated financial statements. It defines what a subsidiary is, how control is determined, and the accounting requirements for preparing consolidated financial statements for a group under a parent entity's control, including elimination of intercompany transactions and non-controlling interests.

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11 views

Business Combination IFRS 3

The document provides an overview of subsidiaries and consolidated financial statements. It defines what a subsidiary is, how control is determined, and the accounting requirements for preparing consolidated financial statements for a group under a parent entity's control, including elimination of intercompany transactions and non-controlling interests.

Uploaded by

m7md.naga
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Subsidiaries

Overview of session

• Introduction
• Definition of a subsidiary
• Consolidated financial statements
• Disclosure

2
• Preparation and presentation of consolidated financial
statements for a group of entities under the control of a
parent
• Accounting for investments in subsidiary

3
• A group = parent and all its subsidiaries
• A subsidiary = an entity controlled by another entity (it’s Parent)
• A parent = entity that has one or more subsidiaries
• Control = the power to govern financial and operating policies of an
entity so as to benefit from it’s activities
• Consolidated financial statements = the financial statements of a
group presented as those of a single entity.
• Non controlling interest = that part of the net results of operations and
of net assets of a subsidiary attributable to interests which are not
owned, directly or indirectly through subsidiaries, by the parent.
4
What is a subsidiary?

‘‘Control = the power to govern financial and operating


policies of an entity so as to benefit from it’s activities’’
P holds 50% + ordinary voting shares in S
holds < 50% ordinary shares, but still controls the financial/operating
policies

5
What is a subsidiary?

How can P control the financial/operating policies of S when


holding <50% ordinary share
• Majority voting power by agreement with others
• Control by contract
• Power to appoint/remove the majority of the directors
• Power to cast the majority of votes at board meetingss?

6
Potential voting rights

• Applies where potential voting rights exist (e.g. share options)


• Existence and effect of these should be considered
• Also consider whether economic cost of exercising options
• makes it unlikely to occur

7
Exemption from preparing
group accounts
• Wholly owned subsidiary
• Not publicly traded
• Not in the process of issuing securities
• Ultimate or intermediate parent prepares CFS

8
Treatment in parent entity
accounts
• In Parent’s separate accounts:
• Cost or
• Accounted for as a Financial Asset (under IAS 39)

9
Consolidation

• Consolidation = combining the accounts of the Parent and


it’s Subsidiaries so as they are presented as one entity.
• Start Consolidation :When control of S commences
• Legal date
• Economic date
• Cease Consolidation
• When control of S stops

10
Mechanics of
Consolidation
• Accounting Policies :
• If S uses different accounting policies to P (i.e. local GAAP) accounts must be
adjusted, or stated that the difference is immaterial
• Accounting Dates
• Subsidiaries accounting dates must fall +/- 3 months from the accounting date of
the Parent. Significant transactions / other events must be adjusted for.
• Inter-company Eliminations
• Eliminate inter-company balances and transactions and resulting unrealized
profits Unrealized losses from inter-company transactions should also be
eliminated (unless cost cannot be recovered).

11
Business Combination
Step#1: To Calculate the Goodwill

As of Purchase date
Consideration transferred at fair value +
Previously held interest @ fair value+
Contingent consideration at FV+
Deferred consideration FV+ Number of shares
OR
Non controlling interest Net assete proportions
- Deferred tax of net assets adjustments
(Net assets acquired at FV*)
GOODWILL
12
Business Combination
• Step#3: Elimination

As of Purchase date As of Purchase date

Dr. Goodwill Cr. Investment in Subsidiary (


includes deferred or contingent
Dr. PPE (adjustment for FV) consideration
Dr. Inventory (adjustment for FV) Cr. NCI
Dr. Intangibles (Adjustment for FV) Cr. Deferred tax liability
Dr. subsidiary Capital Cr. Liability Adjustments for FV
Dr. Subsidiary RE
Dr. OCE

13
Dr. Deferred tax asset

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