CONSOLIDATION

PART 1

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• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.

• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

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• FRESH CLASSES• ICAP module B & D

•FINANCIAL ACCOUNTING & COST ACCOUNTING

• INDIVIDUAL & GROUPS

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•NEW CLASSES OF MA-ECONOMICS-EXTERNAL

•PREVIOUS..MICRO AND STATISTICS

A B C

1.

Acquires control of B’s net assets

Liquidates

2.

Acquires control of B’s net assets

Continues, holding shares in A

Type 1 and 2 are both ACQUISITIONS

Type 1 and 2 are both ACQUISITIONS

3.

Liquidates Liquidates A new entity (C) is formed

In Type 3, A and B have MERGED

In Type 3, A and B have MERGED

Apart from these, a business combination may take another form

When 1 company acquires the shares of another company, rather than its net assets

Over the next 3 weeks, we will concentrate on business combinations involving acquisition of shares

Over the next 3 weeks, we will concentrate on business combinations involving acquisition of shares

Learning Objectives

You will be able to1. Define an Economic Entity2. Explain the concept of Control3. Identify factors that indicate

Control4. Differentiate between pre & post

acquisition equity5. Explain the purpose of Elimination

Entries

1.a Economic Entity

An economic entity (or group) includes

a controlling entity &

1 or more controlled entities,

operating together

to achieve objectives consistent with those of the controlling entity

Learning Objective 1Learning Objective 1

1.a Economic Entity

Vodafone FijiTelecom Fiji

ATH

Example

Amalgamated Telecom Holdings Limited (ATH)

Domestic Telecommunications

Domestic Telecommunications

Cellular Mobile Telecommunications

Cellular Mobile Telecommunications

TelecommunicationsTelecommunications

1.b Economic Entity

An economic entity constitutes a reporting entity.

Therefore,

1. An additional set of accounts must be prepared

Known as Consolidated Statements2. Using a Consolidation Worksheet

Not in the books of an individual company

1.b Economic Entity

Statements of Telecom

Statements of FINTEL

Statements of Vodafone

Statements of Connect

Statements of Fiji Directories

Consolidated Statements of

ATH

Consolidation Worksheet

Consolidation Worksheet

2. Control

What is meant by control?

In the context of consolidation

Learning Objective 2Learning Objective 2

2.a Control Control exists, where one entity is able to influence decision-making of another

entity both financial & operating

to enable the controlled entity to operate with it in achieving its own objectives

2.a Control Decision Rules

If one entity owns more than 50% of the shares in another other entity

Control is presumed to exist

Control may be Direct or Indirect

2.b Direct & Indirect Control

Vodafone (51%)Telecom (100%)

ATH

FNPF (58.2%)

Direct Control (Parent) of ATH

Indirect Control of Telecom & FINTEL

Direct Control (Parent) of ATH

Indirect Control of Telecom & FINTEL

Direct Control (Parent) of Telecom & Vodafone Direct Control (Parent) of Telecom & Vodafone

Subsidiary of ATHSubsidiary of ATH Subsidiary of ATHSubsidiary of ATH

3. Factors indicating Control

Can control exist when an entity owns less than 50% of the shares in another entity?

Yes, if certain factors are met

Learning Objective 3Learning Objective 3

3. Factors indicating Control Does the entity have the capacity to

1. Dominate composition of Board of Directors?

2. Appoint or remove all or a majority of the Directors?

3. Cast the majority of votes at a meeting of the Board?

4. Control the casting of a majority of votes at a meeting of the Board?

Can you see why control is linked to Share Ownership?

3. Factors indicating Control

Example

ATH does not own any shares in FINTEL51% owned by Fiji Government49% by Cable & Wireless

However, ATH has rights to manage Government’s shares

As such, it is able to cast a majority of votes

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• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.

• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

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4. Pre & Post Acquisition Equity

We are talking about equity of the subsidiary.At any time, equity can be divided into1. Pre-acquisition Equity2. Post-acquisition Equity

Learning Objective 4Learning Objective 4

What is the difference between them?

4. Pre & Post acquisition Equity

Subsidiary’s Post-acquisition

Equity

Subsidiary’s Pre-acquisition

Equity

Date of Acquisition

Existing Capital,

Reserves & Retained Profits

Additional Capital,

Reserves & Retained Profits

4. Pre & Post Acquisition Equity

The distinction is important because

1. Cost of acquisition is compared with pre-acquisition equity to determine goodwill

2. Treatment of dividends differs for pre & post acquisition equity

Example 1On 1 April 2006, Tonga Ltd acquired all the shares of Nuku

Ltd for a cash payment of $225,000

On that date, the equity of Nuku Ltd consisted of

Share Capital $150,000 Reserves $ 30,000 Retained Profits $ 20,000

RequiredRecord the combination in the books of Tonga

Ltd

Business Combinations

Calculate

Fair Value of Identifiable Net Assets Acquired

(FV of INA)

Calculate

Cost of Acquisition (COA)

Calculate

Goodwill or Negative Goodwill

Step 1

Step 2

Step 3

Calculate Fair Valueof Identifiable Net Assets

Since A-L = OE

Fair value of identifiable net assets

Can also be calculated from the equity of the acquiree

Step 1

Calculate Fair Valueof Identifiable Net Assets

Step 1

Equity Item AmountEquity Item Amount

Share Capital 150,000

Reserves 30,000

Retained Profits 20,000

Share Capital 150,000

Reserves 30,000

Retained Profits 20,000

Total $200,000Total $200,000

Calculate Cost of Acquisition

Step 2

Immediate cash payment of $225,000

Calculate GoodwillStep 3

Cost of Acquisition 225,000Cost of Acquisition 225,000

Less Fair Value of INA 200,000Less Fair Value of INA 200,000

Goodwill $ 25,000Goodwill $ 25,000

Acquirer’s Entries at Date of Acquisition

Tonga Limited receives shares

Dr Shares in Nuku Limited 225,000Cr Cash 225,000

Goodwill to be recognised as part of elimination entry

Step 4

Assumptions This week, we will work with the following

assumptions Consolidation occurs at time of

acquisition Only 1 Subsidiary in the Group Parent owns 100% of shares in

Subsidiary

We will introduce more advanced issues later

5. Elimination Entries

What is an elimination entry?

Learning Objective 5Learning Objective 5

IllustrationConsider a family of 3

Father (employed as a manager)Weekly take-home pay of $500

Mother (sells food parcels from home)Collects an average of $100/week Receives $150/week from husband for

housekeeping

1 child, Mere (full-time student)Receives $25/week as pocket-money from her

parentsReceives $15/week as allowance from her

sponsor

Illustration

Family Member AmountFamily Member Amount

Father 500Father 500

Mother 100 + 150 = 250Mother 100 + 150 = 250

Mere 25 + 15 = 40Mere 25 + 15 = 40

Calculate how much each family member receives in a week

Illustration

Family Member AmountFamily Member Amount

Father 500Father 500

Mother 100 + 150 – 150 = 100Mother 100 + 150 – 150 = 100

Mere 25 + 15 – 25 = 15Mere 25 + 15 – 25 = 15

Calculate how much the family receives in a week

Total $615Total $615

We must exclude or eliminate transactions within the family

JOIN KHALID AZIZ

• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.

• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

• CONTACT:• 0322-3385752• 0312-2302870• R-1173,ALNOOR SOCIETY, BLOCK

19,F.B.AREA, KARACHI, PAKISTAN.