Week 6: Chapters 15 & 16

Chapter 15

Explain the meaning of consolidated financial statement

AASB 10 requires the application of the consolidation method
Consolidation: process of preparing single set of financial
statements for group of entities under control of one of
those entities

Involves combining financial statements of individual entities

to show financial position and performance of group as if it
were a single entity

Group parent and subsidiaries

Parent entity that controls one or more entities
Subsidiary an entity that is controlled by another entity

Consolidated financial statements prepared by

1. Combining, line by line, like items of assets, liabilities, equity,
income and expenses
2. Adjusting these combined figures for inter-group transactions
between entities within the group

Discuss the meaning and application of the criterion of control

Criterion for identifying parent-subsidiary relationship is
control
Significant judgement is often required in determining whether
control exists
Three elements required:
1. Power over the investee
2. Exposure to, or rights, to variable returns from its involvement
with the investee
3. The ability to use its power over the investee to affect the
amount of the investors returns
All three elements must be present for control to exist
Element 1 power

Power: existing rights that give the current ability to direct

the relevant activities

Power arises from rights. Most rights arise from a legal

contract.
E.g.
o Voting rights
o Rights to appoint, reassign or remove members of
management
o Rights to direct the investee
Rights must be substantive the holder must have the
practical ability to exercise the rights (e.g. debtholders have
rights but only protective rights)
Judgment required in determining. Factors to consider (AASB
10)
o Whether the party that holds the rights would benefit
from exercising the rights
o Whether there are any barriers that prevent a holder
from exercising rights
o Where multiple parties, where there is a mechanism in
place to enable those parties to practically exercise the
rights
If a right is protective no power
Protective rights designed to protect the interest of the party
without giving them power over the entity
E.g. loan covenants, right of NCI to approve various
transactions, right of lender to seize assets
Requires ability to direct rather than actually directing
Ability must be current
Must be relevant activities that are being directed i.e.
activities of the investee that significantly affect the investees
returns
Power presumed to exist where investor owns moer than 50%
voting rights
Voting rights < 50% can result in an investor having power
over an investee
Factors to consider
o Dispersion of other SH: probability of SH attending
meeting lessened by location and size of share parcels
o Attendance at AGMs: if only 60% of eligible votes attend
meeting, 31% can control meeting
o Existence of contracts: power by agreement with other
investors
Problems relating to having power <50%
o Temporary control: 31% ownership can control if only
60% in year 1 but not if 70% in year 2

o Friendly relationship can turn unfriendly

Element 2- Exposure or rights to variable returns

Requires that the investor has the rights to variable
returns from the investee
Examples of returns:
Dividends
Obtaining scarce raw materials on priority basis
Gaining access to subsidiarys distribution network, patents
Economies of scale
Denying or regulating access to subsidiarys assets to
competitors
Element 2- ability to use the power to affect returns
Requires that the parent have the ability to increase its
benefits and limit its losses from the subsidiarys activities

All 3 elements must be present for control to exist

No control = no parent-subsidiary relationship = no
consolidation

Discuss which entities should prepare consolidated financial

statements
AASB 10 applies to all parents unless the meet ALL of the following:
1. It is a wholly-owned subsidiary or a partially-owned subsidiary
and all other owners dont object to the parent not presenting
consolidated financial statements
2. Its debt or equity instruments arent trade in a public market
3. It isnt required to file financial statements with a securities
commission or other organization for the purpose of issuing
instruments in a public market
4. Its ultimate or any intermediate parent produces consolidated
financial statements available for public use and comply with
AASB

AASB10 Australian specific guidance:

AUS4.2
Where condition iv is not met due to the effects of the
Australian reduced disclosure requirements, Aus4.2 extends
the relief from preparing consolidated financial statements
To apply paragraph Aus4.2 a parents still must meet
conditions i-ii
Aus4.1
Notwithstanding paragraph 4, an ultimate parent shall present
consolidated financial statements when either the parent
and/or group is a reporting entity.
Business combinations and consolidation
An acquirer is the combining entity that obtains control of the
other combining entities in a business combo
Parent usually is acquirer
Exceptions arise when:
o New entity is formed which acquires all shares of
previously existing entities
o Reverse acquisition occurs

Chapter 16
The consolidation proves
Before consolidating, it may be necessary to adjust subsidiarys
financial statements where:
1. the subsidiarys balance date is different to the parent
subsidiary required to prepare adjusted financial statements
at parents reporting date
2. the subsidiarys accounting policies are different to the
parents- subsidiary is required to prepare adjusted accounts to
ensure accounting policies consistent with parent
Consolidation involves adding together the financial statements of
the parent and subsidiaries and making a no of adjustments:
Business combo valuation entires required to adjust the CA
of the subsidiarys asset and liabilities to FV

Pre-acquisition
C o n s o l i d aentries
t i o n w o rrequired
k s h e e t s to eliminate the CA of the
parents investment in each subsidiary against the preacquisition equity of that subsidiary
C o n s o l i d a t i o n j o u between
r n a l s a r e p o s entities
t e d i n t o t h e within
c o n s o l i d athe
t i o n group subsequent to
Transactions
w o r k s h e e t in a d ju s t m e n t c o lu m n s a s f o llo w s :
acquisition date
E x tr a c t o n ly

P a ren t

S u b s i d ia r y

Land
I n v t in S L t d
R e c e iv a b l e s
C ash

400
120
200
40
760

150

S h a re c a p it a l
R e t a in e d e a r n in g s
C re d ito rs

5
1
1
7

10
2
5
17

0
6
0
6

0
0
0
0

XX
XX
XX

20
170
0
0
0
0

XX
XX
XX

X
X
X
X
XX

X
X
X
X
X

X
X
X
XX

X
X
X
X

A d d d o w n fo r
s u b - t o ta l s

- A ll c o n s o l. jo u r n a ls r e c o r d e d in th e s e D R /C R c o l u m n s
- W h e r e th e r e a r e a l a r g e n u m b e r o f j o u r n a l s i t i s c o m m o n t o n u m b e r t h e m 1 ,2 , 3 e t c .
- P u r p o s e - to r e m o v e t h e p a r e n t s i n v e s tm e n t i n t h e s u b s i d i a r y a n d th e e ff e c t o f a l l
i n te r e n ti ty t r a n s a c t io n s s o th a t t h e fi n a l c o l u m n s h o w s a n e x te r n a l v i e w

Consolidation journal adjustments are ONLY prepared for the

purpose of consolidation
Posted onto the consolidation ONLY- NOT recorde in the books
of the parent or the subsidiary
Result- some consolidation adjustments are repeated every
start with separate trial balan
time consolidated accounts are prepared
Prepare an acquisition analysis for the parents acquisition in aadjustments
C o n s o lid a tio n w o r k s h e e ts
subsidiary
Acquisition analysis
must do it in a separate acco
Compares the cost of acquisition with the FV of the
C o n s onet
l i d a t i oassets
n j o u r n a l aand
d j u s t mcontingent
e n t s a r e O N L Y liabilities
p re p a re d
identifiable
(FVINA)
f o r t h e p u r p o s e o f c o n s o lid a t io n
that exist at acquisition to determine whether there is:
Goodwill
T hon
e y a acquisition
r e p o s t e d o n t o t h (cost>FVINA)
e c o n s o lid a t io n w o r k s h e e t o n ly Bargain t purchase
(cost<FVINA)
h e y a r e N O T r e c o r d e d in th e b o o k s o f th e p a r e n t o r th e
s u b s id ia r y

A s a r goodwill
e s u l t , s o m e is
c o an
n s o l unidentifiable
i d a t i o n a d j u s t m e n t sintangible
a re
Recall:
asset that is
r
e
p
e
a
t
e
d
e
v
e
r
y
t
i
m
e
c
o
n
s
o
l
i
d
a
t
e
d
a
c
c
o
u
n
t
s
a
r
e
calculated as residual value
e p a r e d = assets-liabilities = equity
Netp r assets
FVINA include all identifiable A and L of the subsidiary as well
5
as FV of any contingent liabilities that acquire
may have
Contingent liabilities not recognised in subsidiaries BS
recorded by way of not disclosure only. AASB 3 requires them
to be recognised on the acquisition of another business
Commonly determine the FVINA with reference to the equity
balances of the subsidiary rather than the individual A and L
balances
EXAMPLE

A c q u is itio n a n a ly s is

goodwill - when FV < conside

N O T th e
book
v a lu e

A n a c q u is it io n a n a ly s is c o m p a r e s t h e c o s t o f a c q u is it io n
w it h t h e fa ir v a lu e o f t h e id e n t if ia b le n e t a s s e t s a n d
c o n t in g e n t lia b ilit ie s ( F V I N A ) t h a t e x is t a t a c q u is itio n t o
d e te r m in e w h e th e r th e r e is :
G o o d w ill o n a c q u is itio n ( w h e r e c o s t > F V IN A )
B a r g a in p u r c h a s e ( w h e r e c o s t < F V IN A )

normally goodwill is purchase

when they're worth $600 000

H (parent) acquires L (subsidiary)

E x a m p le b a c k g r o u n d in fo r m a tio n

some of

E x a m p l e net
b aassets
c k g r oLu=n$350
d i n 000
f o r m a ti o n
net assets = A - L

book va

easy way to determine net assets (book value) is to look at equ

W h e n H it e c h a c q u ir e d it s in v e s t m e n t in L o t e c h t h e f o llo w in g
balance (net assets = equity) - much quicker than listingHAVE
all to
in f o r m a t io n a p p lie d :
liabilities and assets

H ite c h L t d a c q u ir e d a ll o f t h e is s u e d s h a r e c a p ita l o f
L o te c h L td o n 3 0 J u n e 2 0 1 1 fo r a c a s h c o n s id e r a tio n o f
$ 4 0 0 ,0 0 0

A cSome
q u i se it htassets
i o n a s no f aL orecorded
lt eyc hsL it dsw e -r e at
n oFVp r e v LAiaobn ud i ul dh ien slgd hbleyyl dL ob t ye cL ho twe ac hs uw na ds e ur vn ad leu revda lbu ye d$ 1b 0y , 0$ 04 05 , 0 0 0 .
A t t h a t t i m of
e n e t a s s e tnot
r e p r e s e n te d a s fo llo w s :
h e<l dFV e q u$ i t y i n t e r e s t Ta nh de wb ua isl d bi ne gi n hg a dd e op rrieg ci ni aa tl el yd c ao ts 1t 0$ %1 0 p0 e, 0r 0y0e a2 r y e a r s a g o
Book
value
!

all need

need to com
HAVE
FV when
for assets
S h a r e c to
a p i t ause
l
3 0 0 , 0 0accounting
0
! A c o n t i
n g e nneed
t l i a b i l i t y rto
e l a t i be
n g t o adjusted
a n u n s e tt le d le g a l c la im
R e ta in e d e a r n in g s

C o s t o f a c q u is itio n

N e t a s s e ts

B o o k v a lu e o f n e t a s s e ts

5 0 ,0 0 0
3 5 0 ,0 0 0

B o o k v a lu e o f id e n ti fi a b le
n e t a s s e ts (B V IN A )

3 0 0 ,0 0 0

- R e ta in e d e a r n in g s

5 0 ,0 0 0
B V IN A

- A f te r t a x i n c r e a s e i n l a n d

7 ,0 0 0

E x a m - pA fltee r ta x bi n ac r ce aks eg i nr ob uui l dni ndg i n f o r m a t i o n

3 1 ,5 0 0
(2 ,1 0 0 )

- A f te r t a x r e c o g n i t i o n o f p r o v i s i o n f o r l e g a l c l a i m
B

cost of acq
start with bo

make adjust

P e r s lid e 8

3 5 0 ,0 0 0

F a ir v a lu e a d ju s tm e n ts

T o ta l f a i r v a l u e a d j u s t m e n t s

- S h a r e c a p ita l

T o ta l b o o k v a l u e o f n e t a s s e t s

$w i t h a f a i r v a l u e o f $ 3 , 0 0 0 w a s r e c o r d e d i n t h e n o t e s t o
L o te c h s fin a n c ia l s ta te m e n ts
1 - P e r s lid e 8
4 0 0 ,0 0 0
T h e t a x r a t e is 3 0 %

3 6 ,4 0 0

W h e n H it e c h a c q u ir e d it s in v e s t m e n t in L o t e c h t h e f o llo w in g
A + B
3 8 6 ,4 0 0
i n f o Fr mV aI Nt iAo n a p p l i e d :

before tax =
1 0 ,0 0 0 x (1 -3 0 % ) = 7 ,0 0 0
you have a
Per
fair values
4 5 , 0 0 0 x ( 1 -some
3 0 % ) = of
3 1 ,the
5 0 0 assets are not recorded at theirthe
tax base
s lid e 9
( 3 ,0 0 0 ) x ( 1 - 3 0 % ) = ( 2 , 1 0 0 )
cost --> if yo
book value < FV
associated D
HAVE to use the fair value when accounting for assets

Prepare the worksheet entries at the acquisition

date, being the
X L%a an gd e h aec l qd ub i ry e Ld o t e c h w a s u n d e r v a l u e d b y $ 1 0 , 0 0 01 0 0 % 3 8 6 , 4 0 0 2
!
business combination valuation entries and the pre-acquisition
I f +all
v e need
- g o o d wtoi l lbe adjusted !
!G oA o bd uwi l idl li /n( bg a hr ge al d i nb py uL r oc the ac sh e w) oa ns au cn qd ue irsv i at i lou ne d b y $ 14 -5 2, 0 0 0 .
1 3 ,6 0 0 I f v e - b a r g a i n p u r c h a s 1e 0
entries
T h e b u ild in g h a d o r ig in a lly c o s t $ 1 0 0 , 0 0 0 2 y e a r s a g o
Parent
interest
a n d w a shas
b e i n gpreviously
d e p r e c i a t e d a t 1 held
0 % p e r equity
year
the previously held equity
! A c o n Where
t i n g e n t l i a b i control
l i t y r e l a t i n g t is
o a nachieved
u n s e t t l e d l e g a in
l c l a stages
im
w i t h a instruments
f a i r v a l u e o f $ 3 , 0 0 0 in
w a sthe
r e c o racquire
d e d i n t h e n omust
te s to
be adjusted to FV prior to
L o te c h s fin a n c ia l s t a te m e n ts
performing the acquisition analysis
T h e ta x r a te is 3 0 %
Require additional entries to 9be made in the parents books
Consolidation entries remain unchanged

BCVR entries
If the BV of subsidiary A and L FV or if a contingent liability
P a r e nexists,
t h a necessary
s p r e v i otou make
s l y hBCVR
e l d eadjustments
q u ity
that:
o Increase or decrease subsidiarys recorded A and L book
in te r e s t
values to FV
o Recognised previously unrecognized assets
W h e r e oc o Recognise
n t r o l i s a c h subsidiarys
i e v e d i n s t a gcontingent
e s t h e p r e v liabilities
i o u s l y h e las
d liabilities
e q u i t y i n s at
t r u FV
m e n t s in th e a c q u ir e e m u s t b e a d ju s t e d t o
fa i r BCVR
v a l u e account
p r i o r t o pise rused
f o r m i to
n g record
t h e a c qthese
u i s i t i oadjustments.
n a n a l y s i s . The BCVR
is similar to the Asset Revaluation Surplus (ARS) account
T h i sWhere
w i l l r e the
q u i r BCVR
e a d d ientry
t i o n a l is
e ndone
t r i e s tin
o the
b e mARS
a d e account
i n t h e in the
p a r subsidiarys
e n t s b o o k s . books it is recorded in the G/L and therefore
automatically carries forward to the future periods once
C o nentered
s o lid a tio n e n tr ie s w ill r e m a in u n c h a n g e d .
BUT
it must
E x aWhere
m p l e : Hthe
i t e centry
h a c q isu i done
r e d 8 5in% the
o f LBCVR
o t e c h on
o n consolidation
30 June
2 0 0 be
5 amanually
n d t h e r e mcarried
a i n i n g forward
1 5 % o n to
3 0 future
J u n e 2periods
011.

11

liability is th
money in th

Land
Land is undervalued by $10 000
BCVR required on consolidation (date of acquisition)
D Land
R

10 000
CR DTL
CR BCVR

3 000 (30%)
7 000 (70%)

Buildings
Buildings must be increase by $45 000
Building in the statement of financial position need to change
as follows
10% depreciation p.a for 2yrs
At present
Required
Buildings at cost
100 000
125 000
Accum. Depreciation (20 000)
0
Book value
80 000
125 000
D Accum Depreciation
R
CR Buildings

20 000
20 000

D Buildings
45 000
R
CR DTL
13 500 (30%)
CR BCVR
31 500 (70%)
Single Journal can be prepared
D Buildings
25 000
R
D Accum. Depreciation 20 000
R
CR DTL
13 500 (30%)
CR BCVR
31 500 (70%)
Contingent Liability
Recognising a contingent liability for the first time will result in
a liability that has a CA but no tax base. Such adjustments
result in a DTA
The BCVR adjustment required is
D BCVR
2 100 (70%)
R
D DTA
900 (30%)
R
CR Provision for legal claim 3 000

g o o d w ill a s g o o d w ill g iv e s r is e to a n e x c lu d e d
te m p r e a r y d iffe r e n c e

19
T h i s e n t r y w i l l a l s o b e p o s t e d o n to th e c o n s o l i d a t i o n w o r k s h e e t- r e f e r s l i d e 2 0 ( R e f 4 )

BC

Goodwill
Goodwill arising on the acquisition if $13 600
BCVR adjustment required is:
D Goodwill
13 600
R
V R a d j u s tCR
m e BCVR
n t s a t a c q u i s i t i 13
o n 600
d a te
no tax effect arising on the recognition of goodwill as goodwill gives
rise to excluded temporary difference
T h e c o n s o lid a tio n jo u r n a ls w ill b e p o s te d o n to th e c o n s o lid a tio n
w o r k s h e e t a t 3 0 J u n e 2 0 1 1 (th e d a te o f a c q u is itio n ) a s fo llo w s :
H itec h
L td .
$ 00 0

C a sh in b a n k

L o tec h
L td .
$000

460

A d j u stm en ts
D R

A c c u m u la te d D e p r e c ia t io n
I n v estm e n t in L o tec h L td

C R

200

D e f er r ed T a x A sse t
L and
B u ild in g

660
0 .9

200
100

10
25

400

(2 0 )
-

20

G o o d w il l

C r e d ito r s

860
160

480
130

1 3 .6

0 .9
210
125

1
2

400
4

1 3 .6
1 ,4 0 9 . 5
290

D efer r ed T a x L ia b ility

3 + 1 3 .5

P r o v isi o n fo r le g a l c la im

S h a r e c a p ita l

600

300

R e ta in ed e a r n in g s

100

50

B C V R
480

N o te
c o n s o lid a te d
b a la n c e s

1 6 .5
3
900
150

2 .1
860

P re

G roup

7 +
3 1 .5 + 1 3 .6

1, 2, 3, 4

50
1 ,4 0 9 . 5

20

Pre-acquisition
G o o d w i l l , p r o v i s i o n a n d B C entry
V R e x i s t o n at
c o n s acquisition
o l i d a ti o n o n l y ( N I L b a l a date
n c e in p a re n t & s u b s b o o k s ).
Equity balances that existed in the subsidiary prior to
acquisition date are referred to as pre-acquisition equity. All
movements after the date of acquisition are referred to as
post-acquisition
You cannot have an investment in yourself nor can you have
equity in yourself these items MUST be eliminated
By acquiring 100% of share capital parent gained control of
all the individual assets
- a c q uPre-acquisition
i s i t i o n e n t r entry
y a t aeliminates
c q u i s i t i the
o n asset
d a t e investment in
subsifiary (in parents books)
D Share Capital
25 000
R
E q u ity b a la n c e s th a t e x is t e d in th e s u b s id ia r y p r io r to
D a Retained
c q u i s i t i o n Earnings
d a t e a r e r e f e r r e d 20
t o a000
s p r e - a c q u is it io n e q u it y .
R
A ll m o v e m e n ts a fte r th e d a te o f a c q u is itio n a r e r e fe r r e d
CR DTL
13 500
to a s p o s t - a c q u is itio n
CR BCVR
31 500
Y o u c a n n o t h a v e a n in v e s t m e n t in y o u r s e lf , n o r c a n y o u
Other
h a vissues
e e q u ity in y o u r s e lf. F r o m a c o n s o lid a te d v ie w p o in t,
t h e NB:
s e i t impact
e m s s h oof
u l dthe
n o tfollowing
e x i s t i . e . ton
h e ythe
m u acquisition
s t b e e l i m i n a analysis:
te d
o
Where
subsidiary
has
recorded
goodwill
at
acquisition
to a v o id d o u b le c o u n tin g
date
B y a c qou i rWhere
i n g 1 0 0 subsidiary
% o f t h e s h ahas
r e c recorded
a p i t a l o f L odividends
t e c h , H i t e cat
h acquisition
e f f e c t i v e l ydate
g a in e d c o n tr o l o f a ll o f th e in d iv id u a l a s s e t s
a n d lia b ilitie s o f L o te c h . It is t h e s e b a la n c e s th a t s h o u ld
b e r e f l e c t e d i n t h e c o n s o l i d a t e d s t a t e m e n t o f f i n a n c i a 2l 1
p o s itio n

a s s e t fa ir v a lu e s b e fo r e s u c h a g a in is r e c o g n is e d
A s s u m e H it e c h p a id $ 3 6 0 ,0 0 0 f o r L o te c h .
( A c q u i s it io n a n a l y s is o n f o ll o w in g p a g e )

P r e - a c q u is it io n e n t r y a t 3 0 J u n e 2 0 1 1 is :

Gain
D R S on
h a r ebargain
c a p i t a l purchase 3 0 0 , 0 0 0
purchase
D R R eAt a gain
i n e d e aon
r n i nbargain
gs
5 0 , 0 0 0 is rare and AASB 10 recommends
and confirmation
of net asset FV before such a
D R B Cre-assessment
VR
3 6 ,4 0 0
C Rgain
I n v e is
s t m recognised
ent
3 6 0 ,0 0 0
G a i n o n bHitech
a r g a i n p upaid
r c h a s $360
e ( P & L )000 for
2 6 , 4Lotech
0 0 25
C RAssume
Pre-acquisition entry is:
D Share Capital
300 000
R
D Retained Earnings
50 000
R
D BCVR
36 400
R
G a i n o n CR
b a r gInvestment
a in p u r c h a s e
360 000
CR Gain on bargain purchase (P&L)
26 400
$
C o s t o f a c q u is i t io n

3 6 0 ,0 0 0

B o o k v a l u e o f n e t a s s e ts
- S h a r e c a p i ta l

3 0 0 ,0 0 0

- R e ta in e d e a r n in g s

5 0 ,0 0 0

T o t a l b o o k v a lu e o f n e t a s s e ts

3 5 0 ,0 0 0

F a i r v a lu e ( B C V R ) a d j u s t m e n ts
- A f te r t a x i n c r e a s e i n la n d

7 ,0 0 0

- A f te r t a x i n c r e a s e i n b u i l d i n g

3 1 ,5 0 0

- A f te r t a x r e c o g n i t i o n o f p r o v i s i o n f o r l e g a l c l a i m

( 2 ,1 0 0 )

T o t a l f a ir v a l u e a d j u s t m e n ts

N o change

3 6 ,4 0 0

F V IN A

3 8 6 ,4 0 0

X % a g e a c q u ir e d

100%

G a i n o n b a r g a in p u rc h a s e o n a c q u is itio n

3 8 6 ,4 0 0
( 2 6 ,4 0 0 )

- v e th e r e f o r e g a i n - c o s t < F V I N A 2 6

Prepare the worksheet entries in period subsequent to the

acquisition date, adjusting for movements in assets and liabilities
since acquisition date and dividends from pre-acquisition equity
BCVR adjustment entries may differ due to transactions and
events occurring since acquisition
The pre-acquisition entry may also be affected by a number of
events

W o r k s h e e t e n tr i e s s u b s e q u e n t to
a c q u Land
i s i ti o n d a te
BCVR

What if, during the year 30 June 2013 the land was sold for
S o f a r , $250
w e h a v e000?
c o n s id e r e d t h e c o n s o lid a tio n jo u r n a ls
r e q u i r e On
d i f a sale:
c o n s o lid a tio n w a s b e in g p r e p a r e d o n th e
a c q u is it io n d a te

D Cash

250 000

H o w d o t h e s e jo u r n a ls c h a n g e if a c o n s o lid a t io n is b e in g
R
p r e p a r e d o n a la t e r d a te ?

CR Gain on Sale

50 000

T h e b u s i n e s s c oCR
m b i n Land
a t i o n v a l u a t i o n a d j u s200
t m e n t000
e n t r ie s
m a y d iff e r d u e t o t r a n s a c t io n s a n d e v e n t s o c c u r r in g s in c e
a c q u is a
i t i o group
n
From
viewpoint the gain on sale was $40 000 (not $50 000)

as
$210 000
T h ethe
p r e -CA
a c q uof
i s i tthe
i o n e land
n t r y m on
a y a consolidation
l s o b e a f f e c t e d b y was
a
n u m b e r o f e v e n ts
27

Until land is sold (30 June 2011 & 30 June 2012)

D Land
10 000
R
CR DTL
3 000
CR BCVR
7 000
Year the land is sold (30 June 2013)
D Gain on sale
10 000
R
CR ITE
CR Transfer from BCVR

3 000
7 000

In future years (2014+)

No BCVR entry required (no effect on R/E)
However an adjustment is required to pre-acquisition entry
Buildings
Consequential depreciation adjustment is required in relation
to depreciable assets that are revalued to FV on acquisition of
a subsidiary
Required as the subsidiary is continuing to depreciate the
asset based on its cost, which is lower than the FV
For consolidated perspective, the depreciation charge is
understated
Lotech
Group
Difference
CA at date of
80 000
125 000
45 000
acquisition
Remaining
8 yrs
8 yrs
8 yrs
useful life
Annual
10 000
15625
5 625
depreciation
1 yr after acquisition the original entry plus the following are
required:
D Depreciation expense
5 625
R
CR Accum depreciation
5 625
Over the next 8 yrs we are also required to progressively reverse the
DTl created with the original valuation adjustment.
D DTL
1687.5
R
CR ITE
1687.5

2yrs after acquisition

D Depreciation expense
R Retained earnings

5 625 (2013)
5 625 (2012)

D
R
D DTL
R

CR Accum depreciation
3 375 (2012 + 2013)
CR ITE
CR Retained earnings

11 250

1 687.5 (2013)
1 687.5 (2012)

Contingent Liability
On 1 Jan 2012 the legal claim was settled for $2 000
On settlement, Lotech Ltd will recognise the following journal:
D Expense Legal Fees
2 000
R
CR Cash
2 000

As the liability no longer exists, it shouldnt continue to be

carried forward on consolidation. The BCVR adjustment must
recognise the settlement and any gain(loss) on settlement
Liability recognised = 3 000
Cost to settle = 2 000
Gain on settlement = 1 000 (overprovision)
Until settlement (30 June 2011)
D BCVR
2 100
R DTA
900
D
R
CR Provision for legal claim

3 000

In the year the liability is settled (30 June 2012)

D Transfer from BCVR
2 100
R ITE
900
D
R
CR Expense- legal fees
2 000
CR Gain on settlement
1 000
In future years (2013+)
No BCVR entry required (no effect on retained earnings)
However an adjustment is required to the pre-acquisition entry
Goodwill Impairment
On acquisition the balance of goodwill was $13 600
On 30 June 2012, goodwill is assessed to have a recoverable
value of $13000. The goodwill is considered to be impaired
necessary to reduce the value of goodwill
Must prepare original (other journals):
D Goodwill
13 600

R
CR BCVR

13 600

D Impairment expense
600
R
CR Goodwill - Accum impairment losses
In future years:
D Retained Earnings
600
R
CR Goodwill -Accum impairment losses

600

600

Changes to pre-acquisition entry

The pre-acquisition entry is required everytime a
consolidation is completed and doesnt change, except
under the following circumstances
o When a bonus share dividend is paid from preacquisition equity
o Transfers between pre-acquisition RE and reserves
(BCVR, General Reserve)
Transfers of pre-acquisition reserves
When a transfer of pre-acquisition reserves is made
subsequent to acquisition a change is required to the preacquisition elimination entry
Consider the sale of the land in the e.g. which was subkect
to FV adjustment
The journals on the following slide show how the sale of the
land would have affected the pre-acquisition entry
NB: other types of reserve transfers are dealt with in the
same way as BCVR transfers
Year the land is sold (30 June 2013)
D Share Capital
300 000
R Retained earnings
50 000
D BCVR
50 000
R
D
R
CR Investment
4 000
D Transfer from BCVR (R/E)
R
CR BCVR
In future years (2014+)
D Share Capital
R Retained earnings
D BCVR

7 000
7 000
300 000
57 000 (50 + 7)
43 000 (50 7)

R
D
R
CR Investment

4 000