CONSOLIDATION PART 1

1. CONSOLIDATION PART 1

2. 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.

3. JOIN KHALID AZIZ • FRESH CLASSES • ICap module b & d • FINANCIAL ACCOUNTING & COST ACCOUNTING • INDIVIDUAL & GROUPS

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5. Announcements Supplementary Workshops Commence this week Schedule on Class-share All queries to Rajni Test 3 Saturday 9:00 AM Foreign Currency & Liquidation

6. Revision Last week, we learnt about 3 forms of business combinations Do you remember what they are?

7. Revision Type 1 and 2 are both ACQUISITIONS In Type 3, A and B have MERGED

8. Revision 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

9. Learning Objectives You will be able to 1. Define an Economic Entity 2. Explain the concept of Control 3. Identify factors that indicate Control 4. Differentiate between pre & post acquisition equity 5. Explain the purpose of Elimination Entries

10. Learning Objective 1 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

11. 1.a Economic Entity Example Amalgamated Telecom Holdings Limited (ATH) ATH Telecommunications Telecom Fiji Vodafone Fiji Domestic Telecommunications Cellular Mobile Telecommunications

12. 1.b Economic Entity An economic entity constitutes a reporting entity. Therefore, • An additional set of accounts must be prepared • Known as Consolidated Statements • Using a Consolidation Worksheet • Not in the books of an individual company

13. 1.b Economic Entity Statements of Vodafone Statements of Connect Statements of Telecom Statements of Fiji Directories Statements of FINTEL Consolidation Worksheet Consolidated Statements of ATH

14. Learning Objective 2 2. Control What is meant by control? • In the context of consolidation

15. 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

16. 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

17. 2.b Direct & Indirect Control FNPF (58.2%) Direct Control (Parent) of ATH Indirect Control of Telecom & FINTEL ATH Direct Control (Parent) of Telecom & Vodafone Telecom (100%) Vodafone (51%) Subsidiary of ATH Subsidiary of ATH

18. Learning Objective 3 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

19. 3. Factors indicating Control Does the entity have the capacity to • Dominate composition of Board of Directors? • Appoint or remove all or a majority of the Directors? • Cast the majority of votes at a meeting of the Board? • Control the casting of a majority of votes at a meeting of the Board? Can you see why control is linked to Share Ownership?

20. 3. Factors indicating Control Example ATH does not own any shares in FINTEL • 51% owned by Fiji Government • 49% by Cable & Wireless However, ATH has rights to manage Government’s shares • As such, it is able to cast a majority of votes

21. 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.

22. Learning Objective 4 4. Pre & Post Acquisition Equity We are talking about equity of the subsidiary. At any time, equity can be divided into • Pre-acquisition Equity • Post-acquisition Equity What is the difference between them?

23. 4. Pre & Post acquisition Equity Subsidiary’s Post-acquisition Equity Subsidiary’s Pre-acquisition Equity Existing Capital, Reserves & Retained Profits Additional Capital, Reserves & Retained Profits Date of Acquisition

24. 4. Pre & Post Acquisition Equity The distinction is important because • Cost of acquisition is compared with pre-acquisition equity to determine goodwill • Treatment of dividends differs for pre & post acquisition equity

25. Example 1 On 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 Required Record the combination in the books of Tonga Ltd

26. Business Combinations Calculate Fair Value of Identifiable Net Assets Acquired (FV of INA) Step 1 Step 2 Calculate Cost of Acquisition (COA) Step 3 Calculate Goodwill or Negative Goodwill

27. Calculate Fair Valueof Identifiable Net Assets Step 1 Since A-L = OE Fair value of identifiable net assets • Can also be calculated from the equity of the acquiree

28. Calculate Fair Valueof Identifiable Net Assets Step 1 Equity Item Amount Share Capital 150,000 Reserves 30,000 Retained Profits 20,000 Total $200,000

29. Calculate Cost of Acquisition Step 2 Immediate cash payment of $225,000

30. Calculate Goodwill Step 3 Cost of Acquisition 225,000 Less Fair Value of INA 200,000 Goodwill $ 25,000

31. Acquirer’s Entries at Date of Acquisition Step 4 Tonga Limited receives shares • Dr Shares in Nuku Limited 225,000 • Cr Cash 225,000 Goodwill to be recognised as part of elimination entry

32. 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

33. Learning Objective 5 5. Elimination Entries What is an elimination entry?

34. Illustration Consider 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 parents • Receives $15/week as allowance from her sponsor

35. Illustration Calculate how much each family member receives in a week Family Member Amount Father 500 Mother 100 + 150 = 250 Mere 25 + 15 = 40

36. Illustration Calculate how much the family receives in a week Family Member Amount Father 500 Mother 100 + 150 – 150 = 100 Mere 25 + 15 – 25 = 15 Total $615 We must exclude or eliminate transactions within the family

37. 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.