Group Structures and Consolidation

Nota:

• An investor controls an investee when the investor is exposed, or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee

1. Power over the investee refers to exisiting rights that investor has that gives it the current ability to direct the relevant activities that significantly affect the investee's returns
2. Only one investor can control investee
3. Pre acquisition equity eliminated

   Nota:

   • Parent's portion of equity won't appear in CFS due to elimination. Only non-controlling interest will. Parents portion of post-acq equity (reserves and retained earnings) are aggregated with those of parent.
   • Dr Share capital of S x Dr Reserves of S        x Dr SOP Retained earnings of S Dr Goodwill ?? Cr Investment (or Shares) in S x Cr Gain from bargain purchase ??
   1. Revaluation surplus so created from fair value adjustment is part of pre-acquisition equity

Nota:

• Diversification into other industries to spread operating risk Vertical integration to participate in factor markets and product markets Horizontal integration to increase market share and reduce competition Pyramding to control resources of another company without paying 100% of their fair value Containment of risk to insulate parent from extended losses incurred by any subsidiary taxation reasons (avoid tax)

Nota:

• 1. Adjustments to prepare for consolidation 2. Elimination of transactions and balance between enitities in the group 3. Aggregation of financial statements of entities in the group 4. Apportionment or allocation between parent shareholders' interest and non-controlling interest

1. Adjustments include ensuring same reporting date

   Nota:

   • When reporting dates of parent and subsidiary are different, subsidiary prepares, for consolidation purposes, additional FS of the same date as parent's FS
2. Uniform accounting policies
3. Data must be made complete and correct before aggregations

   Nota:

   • Leads and lags in recording intragroup transactions
4. Eliminations

   Nota:

   • Intragroup balances and transactions are eliminated. P&L resulting from intragroup transactions recognised in assets are eliminated in full. Intragroup losses may indicate an impairment that requires recognition. Income Taxes applies to temporary differences that aris from elimination of profits and losses resulting from intragroup transactions
   1. S's Pre-acq Equity

      Nota:

      • At the acquisition date P's invesment in S and net assets of S both exist so it would be double counting. P's investment in S and equity of S are internal contra items and would cancel each other. P's investment in S is eliminated against P's portion of the pre-acquisition equity of S 

Nota:

• Parent's own F/S are inadquate because resoures that parent can deploy may be owned by subsidiaries and not revealed in P's balance sheet.  Liabilities contracted through subsidiairies to finance resources are also omitted from P's balance sheet parent's P&L statements and cash flows only shows dividends from subsidiaries not profit or loss and cash generating capacit of subs parent can manipulate its own revenue and profit figures by manipulating subsidiaires' dividend policies and by manipulating volume and price of sales between parent and subs. 

Nota:

• AASB 10 adoptes the entity concept: CFS include 100% of a subsidiary's assets and liabilities, profit and loss, and cash flows whatever the percentage of parent's interest