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30/03/20211Chapter 10Consolidation: whollyowned subsidiaries©2021 John Wiley & Sons Australia LtdThe consolidation processBefore consolidating, it may be necessary to adjust subsidiary’sfinancial statements where:1. The subsidiary’s reporting date is different to the parent’s.In such cases the subsidiary is required to prepare adjustedfinancial statements as at the parent’s reporting date.2. The subsidiary’s accounting policies are different to theparent’s. In such cases the subsidiary is required toprepare adjusted accounts to ensure accounting policiesconsistent with the parent.E.g., 30 June vs. 31 DecemberE.g., cost vs. revaluation methods of accounting for non-current assetsThe consolidation processConsolidation involves adding together the financial statements ofthe parent and subsidiaries and making a number of adjustments:• Business combination valuation entries – required to adjust thecarrying amount of the identifiable assets acquired and theliabilities assumed of the subsidiary to fair value (as at acquisitiondate)• Pre?acquisitions entries – required to eliminate the carryingamount of the parent’s investment in each subsidiary against theparent’s portion of pre?acquisition equity of that subsidiary• Transactions between entities within the group subsequent toacquisition date (chapter 11)1 2 330/03/20212Consolidation worksheets• It is the financial statements of the parent and thesubsidiary that are added together– Not the underlying accounts• The financial statements added together are the:– Statement of financial position– Statement of profit or loss and othercomprehensive income– Statement of changes in equity– Statement of cash flows (see chapter 14)See chapters10 ? 13Consolidation worksheetsTo facilitate the addition process a consolidation worksheet is used:No adjustments are made in the accounting records of the individual entitiesTherefore the entries must be made each time a consolidated worksheet is preparedAcquisition analysis• An acquisition analysis compares the cost of acquisition with thefair value of the identifiable net assets and contingent liabilities(FVINA) that exist at acquisition to determine whether there is:– Goodwill (where cost > FVINA)– Bargain purchase (where cost )• No BCVR entry required (land no longer recorded in the sub’s accounts)• However, this transfer from the BCVR will affect the pre?acquisitionentry each year thereafter (refer to slide 40)Inventory adjustmentsare accounted for in asimilar way to land(refer p. 405 of text)Dr Cost of salesCr Income Tax ExpenseCr TFR from BCVR (R/E)Lecture example – buildings• A consequential depreciation adjustment isrequired in relation to depreciable assets thatare revalued to fair value on acquisition of asubsidiary• Required as the subsidiary is continuing todepreciate the asset based on its cost,which is lower than the fair value• From a consolidated perspective, thedepreciation charge is understated• In relation to the buildings, the adjustment iscalculated as shown on the following slideWorksheet entries subsequent to acquisitiondate31323330/03/202112Worksheet entries subsequent to acquisitiondate SubConsol.DifferenceCarrying amount at date ofacquisition80,000125,00045,000Remaining useful life8 years8 years8 yearsAnnual depreciation10,00015,6255,625 $5,625 p.a. ($15,625 – $10,000) additionaldepreciation expense is required on consolidationLecture example – buildingsAlternatively, $5,625 = $45,000 / 8 yearsWorksheet entries subsequent to acquisitiondateLecture example ? buildings• On 30 June 2023 – 1 year after acquisition record the following: Dr Accum. DepreciationCr Buildings20,00020,000Dr Buildings45,000Cr DTL13,500Cr BCVR31,500Dr Depreciation expenseCr Accum. depreciationDr DTL (30% x 5,625)Cr Income Tax Expense (ITE)5,6255,6251,687.51,687.5 Over the next eight years we progressively reverse the DTL created withthe original valuation entry• Buildings – Y/E 30 June 2024 – two years after acquisition: Dr Accum. Depreciation20,000Cr Buildings20,000Dr Buildings45,000Cr DTL13,500Cr BCVR31,500Dr Depreciation expense5,6252024 expenseDr Retained earnings5,6252023 expenseCr Accum depreciation11,2502023 + 2024Dr DTLCr ITE3,3752023 + 20241,687.51,687.52024 adj.Cr Retained earnings2023 adj. Worksheet entries subsequent to acquisitiondate34353630/03/202113Lecture example – contingent liability• On 1 January 2023 the legal claim was settled for $2,000• On settlement, Sub Ltd will recogni

se the following journalDr Expense ? legal fees 2,000Cr Cash 2,000• As the liability no longer exists, it should not continue to becarried forward on consolidation– The business combination valuation adjustment must recognise thesettlement and any gain/(loss) on settlementLiability recognised 3,000Cost to settle 2,000Gain on settlement 1,000 ? overprovisionWorksheet entries subsequent to acquisitiondateUntil settlement (30 June 2022) Dr BCVR2,100Dr DTA900Cr Provision for legal claim3,000In the year the liability is settled (30 June 2023)Dr Transfer from BCVRDr ITEP/L2,100900Cr Expense – legal feesP/L2,000Elimination on consolidation ofexpense recorded in Sub’s books Cr Gain on settlementIn future years (2024 >)P/L1,000Over?provision • No BCVR entry required (the provision is no longer required)• However, this transfer from the BCVR will affect the pre?acquisitionentry each year thereafter (refer to slide 40)Worksheet entries subsequent to acquisitiondateWorksheet entries subsequent to acquisitiondateLecture example – goodwill impairment• On acquisition the balance of goodwill was $13,600– On 30 June 2023, goodwill has a recoverable value of $13,000– Therefore goodwill is impaired and a reduction is required• The following entries are made on 30 June 2023:Dr Goodwill 13,600Cr BCVR 13,600Dr Impairment expense 600Cr Goodwill – accum. impairment losses 600P/LIn future years the first entry is made as above and the second entry becomes:Dr Retained earnings (opening balance) 600Cr Goodwill – accum. impairment losses 60037383930/03/202114Worksheet entries subsequent to acquisitiondatePre?acquisition entries• The pre?acquisition entry is required every time aconsolidation is completed• It does not change, except under the following circumstances:– Transfers from the business combination valuation reserve– Such as those just discussed (e.g., on the sale of the land)– Transfers between pre?acquisition retained earnings andother reserves– Such transfers are dealt with in the same way as BCVR transfers– Bonus share dividends paid from pre?acquisition equity– Refer to the example on p. 410Worksheet entries subsequent to acquisitiondate• When a transfer of pre?acquisition reserves is madesubsequent to acquisition– A change is required to the pre?acquisition elimination entry• Consider the land in the lecture example– Up to the point of sale, the increase to fair value was part of the BCVR– On sale this amount was transferred from the BCVR to RetainedEarnings (R/E)• The journals on the following slide show how the sale of theland would have affected the pre?acquisition entryChanges to pre?acquisition entry – transfersof pre?acquisition reservesIn the year the land is sold (30 June 2024) Dr Share capital300,000Dr Retained earnings50,000Dr BCVR50,000Cr Investment in SubDr Transfer from BCVR (R/E)Cr BCVRIn future years (2025 onwards)Dr Share capital400,0007,0007,000300,000Dr Retained earnings57,00050,000 + 7,000Dr BCVRCr Investment in Sub43,000400,00050,000 ? 7,000 An additionalentry isrequired in theyear of sale40414230/03/202115Revaluations in the records of the subsidiaryat acquisition date• Revaluations to fair value can be recorded in thebooks of the subsidiary for certain assets:– AASB 116/IAS 16 Property, Plant and Equipment• But not in all cases: e.g.,– AASB 102/IAS 2 Inventories– AASB 138/IAS 38 Intangible AssetsDisclosures• AASB 3/IFRS 3 Business Combinations– Details of disclosure of information by an acquirerabout business combinations are contained inparagraphs B64–B67 of Appendix B– Examples are provided in Figure 10.17Disclosure• AASB 12/IFRS 12 Disclosure of Interests in Other Entitiesalso requires disclosures in relation to a parent’s interest inits subsidiaries.• Examples are provided in Figure 10.18• Disclosures in relation to subsidiaries are set out in AASB12/IFRS 12 Disclosure of Interests in Other Entities.• An entity shall disclose information that enables users of itsconsolidated financial statements.? To understand:• The composition of the group; and43444530/03/202116Disclosure• The interest that non?controlling interests have in thegroup’s activities and cash flows; and? To evaluate:• The nature and extent of significant restrictions on itsability to access or use assets, and settle liabilities, ofthe group• The nature of, and changes in, the risks associatedwith its interests in consolidated structured entities.• DO NOT WORRY ABOUT REVERSE ACQUISITIONS46