Chapter 21 Purchase Consolidation

1. Chapter 21Purchase Consolidation

2. Lecture Topics • Overview of consolidation processes • Consolidated data and their adjustment • The substitution elimination

3. Lecture References • Text - Chapter 21 • AASBs - 1024 - 1013

4. Key Concepts • Substitution • Elimination • Inter-company investment • Outside equity interests • Pre vs post control events • Consolidation difference

5. Overview of Consolidation Processes • The end product • Processes • Substitution • Elimination of inter-company transactions • Isolation of outside equity interests

6. Consolidation Processes • Organising consolidated data and processes • Memoranda records • Record format • Worksheet design • Worksheet variations • Journal entries

7. Worksheet Design Adjustment Elimination Parent Subsidiary Dr Cr Sum Dr Cr Consol. Paid-up capital 120 90 210 90 120 Reserves 100 20 120 20 100 Retained profits 70 1080 10 70 Owner’s equity 290 120 410290 Accounts receivable 40 20 60 60 Investment in Sub 120 - 120 120 - Plant and Equipment 180 130 310 310 Accounts payable (50) (30) (80) (80) Net Assets 290 120 410290

8. Worksheet Design Adjustment Elimination Parent Subsidiary Dr Cr Sum Dr Cr Consol. Paid-up capital 120 90 210 90 120 Reserves 100 20 120 20 100 Retained profits 70 1080 10 70 Owner’s equity 290 120 410290 Accounts receivable 40 20 60 60 Investment in Sub 120 - 120 120 - Plant and Equipment 180 130 310 310 Accounts payable (50) (30) (80) (80) Net Assets 290 120 410290

9. Worksheet Design Adjustment Elimination Parent Subsidiary Dr Cr Sum Dr Cr Consol. Paid-up capital 120 90 210 90 120 Reserves 100 20 120 20 100 Retained profits 70 1080 10 70 Owner’s equity 290 120 410290 Accounts receivable 40 20 60 60 Investment in Sub 120 - 120 120 - Plant and Equipment 180 130 310 310 Accounts payable (50) (30) (80) (80) Net Assets 290 120 410290

10. Consolidation Data and Their Adjustment • Data requirements • Owner’s equity at acquisition • Fair value of net assets • Non-monetary assets details • Inter-company transactions • Inter-company balances

11. Consolidation Data and Their Adjustment • Data consistency • Uniformity of underlying data • Accounting policies • Classification • Currency • Reporting framework

12. Consolidation Data and Their Adjustment • Data interpretation • Group perspective • Data adjustments • Inconsistent data • Incomplete data

13. eliminate The Substitution Elimination • Elimination of the parent’s investment against owner’s equity of the subsidiary Subsidiary’s books Parent entity’s books Investment in subsidiary Owner’s equity

14. Substitution elimination at date of control SUBSIDIARY PARENT GROUP Capital + Reserves + Retained Profits Capital + Reserves + Retained Profits Capital + Reserves + Retained Profits S/holder interests (OE) eliminate Represented by Investment in Subsidiary Assets less Liabilities Assets less Liabilities Assets less Liabilities Company net assets

15. The Substitution Elimination Standard entry Dr Paid-up capital x Dr Reserves x Dr Retained profits x Cr Investment in subsidiary x

16. Worksheet Design Parent Sub Sum Paid-up capital 120 90 210 Reserves 100 20 120 Retained profits 70 1080 Owner’s equity 290 120 410 Accounts receivable 40 20 60 Investment in Sub 120 - 120 Plant and Equipment 180 130 310 Accounts payable (50) (30) (80) Net Assets 290 120 410

17. Worksheet Design Elimination Parent Sub Sum Dr Cr Paid-up capital 120 90 210 90 Reserves 100 20 120 20 Retained profits 70 1080 10 Owner’s equity 290 120 410 Accounts receivable 40 20 60 Investment in Sub 120 - 120 120 Plant and Equipment 180 130 310 Accounts payable (50) (30) (80) Net Assets 290 120 410

18. Worksheet Design Elimination Parent Sub Sum Dr Cr Cons. Paid-up capital 120 90 210 90 120 Reserves 100 20 120 20 100 Retained profits 70 1080 10 70 Owner’s equity 290 120 410290 Accounts receivable 40 20 60 60 Investment in Sub 120 - 120 120 - Plant and Equipment 180 130 310 310 Accounts payable (50) (30) (80) (80) Net Assets 290 120 410290

19. Worksheet Design Elimination Parent Sub Sum Dr Cr Cons. Paid-up capital 120 90 210 90 120 Reserves 100 20 120 20 100 Retained profits 70 1080 1070 Owner’s equity 290 120 410290 Accounts receivable 40 20 60 60 Investment in Sub 120 - 120 120 - Plant and Equipment 180 130 310 310 Accounts payable (50) (30) (80) (80) Net Assets 290 120 410290

20. The Substitution Elimination • Pre-control and Post-control events • Acquisition date • Control date • Pre-control equities • Post-control equities

21. The Substitution Elimination • Consolidation difference • Goodwill • Cost > equity acquired • Discount • Cost < equity acquired • Brought to account on consolidation only

22. Dr Paid-up Capital x Dr Reserves x Dr Retained Profits x Dr Consolidation Goodwill x Cr Investment in Subsidiary x The Substitution Elimination

23. The Substitution Elimination • Consolidation difference • Disposal • Amortised per AASB 1013 Dr Expense - Amort. of Goodwill x Cr Consolidation Goodwill x

24. The Substitution Elimination • Distributing Pre-control Equities • Pre-control profits not part of consolidated Owner’s Equity • Reduce investment by dividend received • Dividend not revenue

25. Subsidiary pays a dividend from pre-control profits to parent Subsidiary’s Books Dr Retained Profits x Cr Cash at Bank x Parent’s Books Dr Cash at Bank x Cr Investment in Subsidiary x

26. The Substitution Elimination • Substitution in periods after control date • Eliminate pre-control portion only • Adjust for post-control changes

27. Substitution elimination after control date SUBSIDIARY PARENT GROUP Post-control +/- changes Initial capital + Reserves + Retained profits Post-control +/- changes Capital + Reserves + Retained profits Post-control +/- changes Capital + Reserves + Retained profits S/holder interests (OE) eliminate Investment in Subsidiary Represented by Assets less Liabilities Assets less Liabilities Assets less Liabilities Company net assets

28. Where to get more information • Other courses • List books, articles, electronic sources