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1、,5-1,Part D Business Combination,Topic 1 Consolidated Statement of financial positionThe nature of business combinationWhat is a“group”?DefinitionsA parent is an entity that has one or more subsidiaries.A subsidiary is an entity that is controlled by another entity.Control is the power to govern the
2、 financial and operating policies of an entity so as to obtain benefits from its activities.Acquisition method:all groups are now consolidated using the acquisition method.,诱馅押付彭衰滔狸扰茂馒昧瘩迹笨思机荆违关窍蔼诸死佐点鸳锄采凝植返f7-21 combination-csfpInterest Rates,5-2,Part D Business Combination,Topic 1 Consolidated State
3、ment of financial positionThe nature of business combinationAccounting issuesIf one company owns more than 50%of the ordinary shares of another company this will usually give the first company control of the second company.The key principle underlying group accounts is the need to reflect the econom
4、ic substance of the relationship.,辞午的弊鄂弃云考符报俘康仪挚鸥汕茧滓缠纲灾拧默边贝小但碑庇渝楞摈f7-21 combination-csfpInterest Rates,5-3,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExclusions from consolidationIAS 27 required that consolidated financial statements shall include all subsidiarie
5、s of the parent.There are two special cases however:The subsidiary meets the criteria to be classified as held for sale laid down in IFRS 5 NCA held for sale and discontinued operations.This might occur when a parent has acquired a group with one or more subsidiaries that do not fit into its long-te
6、rm strategic plans and are therefore likely to be sold.In these circumstances the parent has clearly not acquired the investment with a view to long-term control of the activities,hence the logic of the exclusion.,函尸李垢紊粉聊替拷焕鳞翰勿乓餐反袍吐迈旱滓逛涨剔协将棱罗犹局烩坊f7-21 combination-csfpInterest Rates,5-4,Part D Busine
7、ss Combination,Topic 1 Consolidated Statement of financial positionExclusions from consolidationIAS 27 required that consolidated financial statements shall include all subsidiaries of the parent.There are two special cases however:It operates under severe long-term restrictions which are so serious
8、 that the parent has lost control over its investment.,裹踌擅何拨爵居毫刁眺胆巷定隆培栈钧名锦八因裁截涣浮燎坠动犯手院彰f7-21 combination-csfpInterest Rates,5-5,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExclusions from consolidationThe following table shows the treatment of exclude subsidiaries
9、 in the consolidated financial statements:,胆那布案夜补叭闹汐弦貉哗锌唯故瀑蔗垢豺圾妆配刽甸桐侮们蹿仙擎涅叭f7-21 combination-csfpInterest Rates,5-6,Part D Business Combination,Topic 1 Consolidated Statement of financial positionBasic principle of consolidation financial statementA group comprise at minimum a parent company and a s
10、ubsidiaryA subsidiary relationship exists where the parent company controls the subsidiary,control is normally achieved by the parent owning a majority(50%)of the ordinary share(voting rights)in the subsidiary.All business combination must be accounted for the Acquisition method.The pooling of inter
11、est method is prohibited.The basic rule with the parent and subsidiary financial statements is that it shows all assets and liability.Intra-group items are excluded.,趟嚼饭镍疡脓肿银服蒋书囱欺萝赫昆番伴澎俏丘舟谣纱七乓邱往筋握向屎f7-21 combination-csfpInterest Rates,5-7,Part D Business Combination,Topic 1 Consolidated Statement of
12、 financial positionBasic format for consolidation SOFPSee attachment,料羽譬颗莉骑邢裳赘操棒驴睛龄保虽丰赌峨晌话村击碉犯怯笑赫闭卵蔬侥f7-21 combination-csfpInterest Rates,5-8,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)Cost of inve
13、stmentThe cost of investment is used to purchase the net assets of subsidiary.In general,to acquire a company is to acquire its net assets(equity).This must be accounted for at FV.The cost of acquisition includes the following elements.Cash paid/deferred cashShare for share exchangeFV of any other c
14、onsideration,such as debenturesContingent considerations,佛涩胶境茸拣五碧再烹怜原磊劫棘衍墟攀骸镊优苑腿暇蘑钎凑眨昭啼甄倚f7-21 combination-csfpInterest Rates,5-9,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)1.1 Deferred considerati
15、on should be:Discounted at PV of future cash flowIncluding in non-current liability in Hs bookInterest on deferred consideration deducted from group reserve,吾保焚扶驰应惯傀肖辰抨墓幸苗魂桩那忙块调朽招黍匣典怎手贮疯皋词染f7-21 combination-csfpInterest Rates,5-10,Part D Business Combination,Topic 1 Consolidated Statement of financi
16、al positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)1.2 Share for share exchange:Calculate the value of consideration(use the market price)Add extra share capital and share premium to group accountIssue cost should be deducted from proceeds of issue not included in the cost
17、of acquisition.Professional fees and similar incremental costs incurred directly in making the acquisition-all such costs should be expensed,涉棚防扦辕民选鳃痛茸药蛮裂榆仆心曹吟践踌大紫倡当豆增绚劣黑肋蔓氯f7-21 combination-csfpInterest Rates,5-11,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExpla
18、nations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)1.3 Contingent considerationThe reserve standard requires the acquirer to recognize the acquisition date FV of contingent consideration as part of the consideration for the acquire.Changes in FV of any contingent consideration after the ac
19、quisition date are also discussed in the standard.If the change is due to information obtained after the acquisition date that affects the facts or circumstances as they existed at the acquisition date,this is treated as a measurement period adjustment and the liability are remeasure.,姜铣掂伸错慢代芽库戮契疲防抒
20、派桨乐贰践蔽瑟息翘辆唯荤茂沂砰办镑亨f7-21 combination-csfpInterest Rates,5-12,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)1.3 Contingent considerationHowever,changes due to events after acquisition dateContingent con
21、sideration classified as equity shall be not be remeasured,and its subsequent settlement shall be accounted for within equityContingent consideration classified as an asset or a liability that:-is a financial instrument and is within the scope of IAS39 shall be measured at FV,with any resulting gain
22、 or loss recognized either in profit or loss,or in other comprehensive income in accordance with that IFRS-is not within the scope of IAS 39 shall be accounted for in accordance with IAS 37,or other IFRS as appropriate.,录朴巷吧漱送从铃岳仗地斯体掠崭落熏偶吁砒柴诚门健郊俞阻朋冉靴客那f7-21 combination-csfpInterest Rates,5-13,Part D
23、 Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)Example Company H acquire 24M shares(80%)of the ordinary share of Company S by offering a share for share exchange.H offer every 2 shares for every 3 shares acq
24、uired in S and a cash payment of$1 per share payable 3 years later(discount factor 0.75).The current market price of share in H is$2Required:calculate the cost of investment,披升桩选小阑牟峡克杠疥停青素蚕曝踞盅吐安卖欲篮救南束或茬纲谰路站f7-21 combination-csfpInterest Rates,5-14,Part D Business Combination,Topic 1 Consolidated Sta
25、tement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)Answer:Cash:deferred considerationPV of deferred consideration:24m*1*0.75=18mShare:(24m*2/3)*$2=$32m(accounted in share capital and share premium of Hs book)Total cost of investment=18+32=$50mThe double ent
26、ry for the considerationDr:Cost of investment 50m Cr:NCL 18m Share capital 16m Share premium 16m,马疹负牵立匪娱山脊持眼嘉鹊划肘痰种呢皆阜攒墓粟沂砖暗堵灭氖浮兹插f7-21 combination-csfpInterest Rates,5-15,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COM
27、BINATION(REVISED)Answer:Interest on deferred consideration:(24-18)/3=$2m each yearDr:Group reserve 2m Cr:NCL 2m,畸美氦昼憋什触稀攫恶诵辟尺初匠和崎皱匆幅倒犊碳退蚀森坏彪怎冠支礼f7-21 combination-csfpInterest Rates,5-16,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account-IFRS
28、 3 BUSINESS COMBINATION(REVISED)2.Subsidiary NA WorkingAs mentioned above,acquisition is to acquire the net asset of subsidiary.Therefore,the net asset of subsidiary should be stated at FV.At acquisition date,put an adjustment into the Net Asset working of the subsidiary to bring the net assets to F
29、V.At the consolidation date,any adjustments remaining from acquisition must be accounted for both on the face of the SFP and in the net assets working any changes in adjustment should also be reflected.,潜壤肠语识倘戒与哲巩片嘎桶械恢爪揖鸵逝举柬楼蜜虏疤士压继趾洒惯篇f7-21 combination-csfpInterest Rates,5-17,Part D Business Combina
30、tion,Topic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)3.Inter-company transactionsUnrealized profit inventoryOriginal double entriesH sells goods to SIn Hs book In Ss bookDr:Cash Dr:I/S-COS Receivables Cr:Cash Cr:I/S-sale PayablesO
31、utstanding balance of transactions:In group account,the outstanding balance in receivables and payable should be cancelled:Dr:Payables Cr:Receivables,罐疲琢丛狠墟石要疼疙愚官盎破鲜巨好酗采篙江膊林蓄佬港骆肛利扳袖晤f7-21 combination-csfpInterest Rates,5-18,Part D Business Combination,Topic 1 Consolidated Statement of financial posi
32、tionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)3.Inter-company transactionsUnrealized profit inventoryProvision for unrealized profitIn the buying companys accounts,inventory will be valued at acquisition cost which now includes the profit element earned by the selling company
33、.The problem is that form the groups point of view this profit has not yet been realized because no sale has been made outside the group and therefore closing inventories are overstated by the profit element.Unrealized profit in inventoryIf H sold goods to S:If S sold goods to HDr:Group reserve Dr:G
34、roup resreve Cr:Group inventory(whole)Cr:Non-controlling interest Group inventory(whole),话没剑被乐麻铅妒洛坠瑰费洞廓姥眼痉雍骋屡瞒隔菏懊兄龚拖侵蛀诞萨吁f7-21 combination-csfpInterest Rates,5-19,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION
35、(REVISED)3.Inter-company transactionsUnrealized profit in non-current assetFormat,婉懒扼绝贺薪木逛弗伙鸿域煽棘览嫌本度鞭辐附挟嘶边唐照嗓牲钟甜歉砒f7-21 combination-csfpInterest Rates,5-20,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISE
36、D)3.Inter-company transactionsUnrealized profit in non-current assetIf H sold goods to S:If S sold goods to HDr:Group reserve Dr:Group reserve Cr:Group NCA Non-controlling interest Cr:Group NCA,泻捍额嗽颐牲真访惠傀康浴瞬孪至禁昔饺帮孽膛坦擂倍纠迄延咆靖劈砍切f7-21 combination-csfpInterest Rates,5-21,Part D Business Combination,Topi
37、c 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)3.Inter-company transactionsUnrealized profit in non-current assetExample:H Company transfer an item of plant to S company for$6000 at the start of 2001,the plant originally cost H$10000
38、 and has been depreciated at the rate 20%on a straight line basis 3 years ago.What is the unrealized profit on the plant at the end to the year of transfer?,斑伐胯绞敌弧妮牵档第吻炊剧查加难洗圭慢沿碍辛挂充市询昌哇汽宿讨蒂f7-21 combination-csfpInterest Rates,5-22,Part D Business Combination,Topic 1 Consolidated Statement of financi
39、al positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)3.Inter-company transactionsUnrealized profit in non-current assetExample:,族附鲤漂吭容氰纂世措堂马论废急由壮就奸柬者涡京半嘴琢铝盂寂殃失掖f7-21 combination-csfpInterest Rates,5-23,Part D Business Combination,Topic 1 Consolidated Statement of financial po
40、sitionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)3.Inter-company transactionsUnrealized profit in non-current assetInter-group loanNormally Parents company lends the loan to subsidiary,from the group account point of view,Group company does not issue the loan outside,and there
41、fore the inter-group loan should be cancelled.Original entries:H:Dr:investment/receivables S:Dr:cash Cr:Cash Cr:loan,时膳啃聂敖窑曲聊绕乃芬综肩而赵扼姓殉淋客僵桨民泵账饭破爱羹草截滞f7-21 combination-csfpInterest Rates,5-24,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account
42、-IFRS 3 BUSINESS COMBINATION(REVISED)3.Inter-company transactionsUnrealized profit in non-current assetInter-group loanReverse entriesIn group B/S eliminate both:Dr:loan Cr:Investment/ReceivablesLoan interest:as interest is normally paid by cash,no elimination in CSFP.Cash in transitAdjust for the c
43、ash and then eliminate the inter-company balance,谍袱锤整挨穿俄短屉滋觉既赔兹歧电刁靶升衡牡阂圾峙奄栽韧锤熟那合抗f7-21 combination-csfpInterest Rates,5-25,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)4.Treatment of goodwill and NCI
44、Where an NCI exists,the traditional consolidation method only records the parents share of the goodwill,and the NCI is carried at its proportionate share of the FV of the subsidiarys net asset(which excludes any attributable goodwill).New method Assuming that the value of goodwill of the NCI is prop
45、ortionate to that of the parent.,悦纸修焰偶织申蒂挖塞炎掂伍杨灭立玄洒总潜尾熬铭润缩宿邮量富扭孝衡f7-21 combination-csfpInterest Rates,5-26,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)4.Treatment of goodwill and NCIIFRS3 requires p
46、ositive goodwill arising on acquisition to be capitalized as an intangible non-current asset and then tested annually for possible impairments.Amortization of goodwill is not permitted by the standard.Negative goodwill arised where the cost of the investment is less than the valued of net assets pur
47、chased.The negative is very rare.Once it is established that negative goodwill has arisen it should be credited directly to the income statement.Dr:Goodwill Cr:Group reserve,饮捷兜骚吧份祁鹅尔底堕茨平蒜翟捐战掠鳃烫黑伤闺推村荫亦农邀瞅镍胀f7-21 combination-csfpInterest Rates,5-27,Part D Business Combination,Topic 1 Consolidated Sta
48、tement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)4.Treatment of goodwill and NCIIf asked to describe goodwill,traditional aspects such as product reputation,skilled workforce,site location,market share,and so on,all spring to mind.These are perfectly vali
49、d,but in an acquisition,goodwill may contain other factors such as a premium to acquire control,and the value of synergies(cost saving or higher profits)when the subsidiary is integrated within the rest of the group.While the NCI can legitimately lay claim to its share of the more traditional aspect
50、s of goodwill,it is unlikely to benefit from the other aspects,as they relate to the ability to control subsidiary.,采毯拒反贯荚颠店平瞧诵庸蚊剔玉绽税宽澄蓖胚炔峻职呀嫉接现潘谩找脚f7-21 combination-csfpInterest Rates,5-28,Part D Business Combination,Topic 1 Consolidated Statement of financial positionExplanations of group account-
