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Consolidation:
Controlled entities
Wholly owned subsidiaries
Chapter 18 & 19
Learning objectives
Controlled Entities
1. Explain the meaning of consolidated financial statements
(p. 906)
2. Discuss the meaning and application of the criterion of
control (p. 909)
3. Discuss which entities should prepare consolidated financial
statements
(p. 915)
4. Explain the nature of an investment entity (p. 917)
5. Outline the relationship between a parent and an acquirer in a
business combination (p. 918)
6. Explain the differences in disclosure requirements between
single entities and consolidated entities (p. 920)
Introduction
Consolidated financial statements
Questions:
Relevant standards:
Consolidated financial
statements
Consolidated financial statements are the financial
statements of a group in which the assets, liabilities, equity,
income, expenses and cash flows of the parent and its
subsidiaries are presented as those of a single economic
Group
a parent
entity
and its subsidiaries
Parent an entity
that controls one or
more entities
Subsidiaries
an entity that is
controlled by
another entity
Consolidated financial
statements
A Ltd
Parent
control must exist (more
on this later)
B Ltd
Subsidiary
Consolidated financial
statements
Consolidation involves combining financial
Consolidated financial
statements
Simple consolidation worksheet for the A Ltd
group
A Ltd
Current assets
B Ltd
Consolidati
on
50 000
20 000
70 000
Non current
assets
150 000
120 000
270 000
Total assets
200 000
Total liabilities
(80 000)
140 000
+
340 000
(30 =
(110 000)
000)
Consolidation
does not involve
adjustments in
of
Consolidation
involve
inthe
theaccounts
accounts230
ofthe
the
Net assets does not120
000adjustments
110 000
000
entities.
Consolidated
financial
statements
are
an
additional
set
of
entities. Consolidated financial statements are an additional set of
financial
financialstatements
statementsand
andare
areprepared
preparedin
inaaconsolidation
consolidationworksheet.
worksheet.
Consolidated financial
statements
Reasons for consolidation:
Supply of relevant
information
Comparable information
Accountability
Reporting of risks and
benefits
It must be relevant
activities that are
being directed
C Ltd
52%
No Control
No parent
subsidiary
relationship
No
consolidatio
n
Preparation of consolidated
financial statements
AASB 10(paragraph 4) requires all parents to prepare
consolidated financial statements
Unless they (the parent entity) meet all of the
following conditions:
i.
Presentation of consolidated
financial statements
A Ltd
Figure 18.4
100%
B Ltd
100%
C Ltd
B Ltd a parent?
A Ltd a parent?
No
Disclosure
Disclosures required by AASB 12
AASB 10 does not specify disclosure requirements
AASB 12 Disclosure of Interests in Other Entities
Sets out the disclosure requirements for consolidated
financial statements
Consolidation worksheets
It is the financial statements of the
comprehensive income
Statement of changes in equity
Statement of cash flows (not covered in
this book)
Consolidation worksheets
P Ltd acquired all the shares of S Ltd on 1.1.X1 for $20,000. At
the date of acquisition the equity of S Ltd consisted of share
capital $15,000 and retained earnings $5,000.
To facilitate the addition process a consolidation worksheet is
used:
31.12.X1
Acquisition analysis
An acquisition analysis compares the cost of
acquisition with the fair value of the identifiable net
assets and contingent liabilities (FVINA) that exist at
acquisition to determine whether there is: NOT the
book value
Acquisition analysis
Parent has no previously held equity interest in
the subsidiary
The FVINA includes:
All identifiable asset and liabilities of the subsidiary
As well as the fair value of any contingent liabilities the
acquiree may have
E.g. AASB 116 allows the use of the fair value basis for the
BUT
Where the entry is done in the BCVR on
consolidation (i.e. on the worksheet) it must be
manually carried forward to future periods
Disclosures
AASB 3 Business Combinations
Disclosure requirements are contained in paragraphs B64B67 of
Appendix B
Examples are provided in Figure 19.17
Tutorial Week 9
Chapter 18
RQ 1, 4, 5
Chapter 19
RQ 1, 8, 10
PQ 19.1, 19.6, 19.9
All students are expected to have attempted all tutorial problems before
attending the tutorial. Specifically, the question(s) that has been bolded.
For further understanding, you are encouraged to attempt Demonstration
Problem.