Which of the following investments owned by Indigo Co should be accounted for using the equity method in the consolidated financial statements? (1) How is a parent-subsidiary relationship identified? Yet, candidates have often demonstrated weaknesses in their understanding of some of the key concepts. �����!j�1[ ����?��?gzy�2���c� ɏ�!���0�CV-w�x���n���Ǿ ^����Ұ����w�f� �.ק��v{� �śO�D2��S��w�.Ͻ��۟ G���S���5��2�>�qJ}X���3u��G�i�F�L��߃)i2{PyQ��\"yVv���w$�Et{�����w0 A Violet only Consolidated financial statements are the financial statements prepared by a company (the parent) which has investments in more than 50% of the common stock of other companies (called subsidiaries). This is why we need to include the fair value of the non-controlling interest in our goodwill calculation. Consolidated financial statements reflect control, not ownership. Here, in this specific OT question, it is the goodwill on acquisition that is being asked for, whereas other questions may ask for the cost of investment that would be recorded in the parent’s books. �� �. Power may be evidenced by all or some of the following: A typical OT may describe a number of different investments and you would need to decide if they are subsidiaries – ie if control exists. Payables         ($70,000 + $42,000 – $4,600) = $107,400. Illustration (6) Note: Answer A is incorrect, as although it correctly cancels the intra-group sale of $5,000, it incorrectly adds the $500 adjustment for unrealised profit to the revenue figure ($79,300 + $29,900 – $5,000 + $500 = $104,700). Purple Co acquired 70% of the voting share capital of Silver Co on 1 October 20X1. These do not give Indigo Co significant influence over Yellow Co and, therefore, Yellow Co is not an associate and would not be equity accounted. exposure, or rights, to variable returns from its involvement with the investee, and. Even though we only own 80% of the share capital, the full goodwill method brings 100% of the goodwill on to the consolidated statement of financial position. This article focuses on some of the main principles of consolidated financial statements that a candidate must be able to understand and gives examples of how they may be tested in objective test questions (OTs) and multi-task questions (MTQs). You need to take the following steps: When the parent doesn’t hold 100% of the outstanding common stock of the subsidiary, it means that some portion of the subsidiary is held by outside investors. Having power and control should make you spot that actually Red Co is a subsidiary and, therefore, would be consolidated line by line in the group accounts and would not be equity accounted. Please note here that in the above statements of financial position, all assets are with “+” and all liabilities are with “-“. The second step here is to identify the provision for unrealised profit (PUP). What should be shown as the consolidated figure for receivables and payables? Illustration 2 is an example of a typical question. A group is made up of a parent and its subsidiary. C $108,700 In accordance with the substance over form principle of accounting, the parent and the subsidiary must be presented as a single economic entity. An associate is defined by IAS 28, Investments in Associates and Joint Ventures as ‘an entity over which the investor has significant influence’. A 1 and 2 Enter the name of your next branch, division or subsidiary in column C. Below that, fill in the numbers from the individual financial statement that correspond to the categories in column A. Without consolidated financial statements, the process of evaluating a company for investment or financing purposes would be a long, complex affair that might altogether miss important assets or liabilities. However make sure you read any other information with regards power to participate or other shareholdings ( see illustration 6). representation on the board of directors of the investee, participation in the policy-making process, material transactions between the investor and investee. Has there been any intra-group trading during the year, irrespective of whether the goods are still included in inventory at the year end? Below that, fill in the numbers from the individual financial statement that correspond to the categories in column A. Checklist for Preparation of Consolidated Financial Statements. When answering OTs and MTQs, remember to: Written by a member of the FA examining team, Virtual classroom support for learning partners, Preparing simple consolidated financial statements, Less: fair value of net assets at acquisition, the power over more than 50% of the voting rights by virtue of agreement with other investors, the power to govern the financial and operating policies of the entity under statute or an agreement, the power to appoint or remove the majority of the members of the board of directors, or. Practising full length consolidation questions will help you grasp a better understanding of consolidation. In the final part of the calculation, following on from the point just made, it is necessary to look at all (100%) of the fair value of net assets at acquisition. by Obaidullah Jan, ACA, CFA and last modified on Mar 15, 2019Studying for CFA® Program? When these balances are eliminated, the consolidated figures become: Receivables     ($50,000 + $30,000 – $4,600) = $75,400 Garbage in, garbage out. endobj Purple Co has made a profit of $1,000 (calculated as revenue of $5,000 – cost of $4,000). At Paper FA level, it is assumed that control exists if the parent company has more than 50% of the ordinary (equity) shares – ie giving them more than 50% of the voting power. For the purpose of consolidated statements, a company is only considered a subsidiary if the parent company holds a controlling interest in that company. The fair value of the non-controlling interest was $30,000 and the fair value of the net assets acquired was $125,000. Although Pink Co only owns 80% of Scarlett Co, it controls 100%. You should look at the specimen paper and extra MTQs available on the ACCA website. In this question the fair value of the non-controlling interest is given, so in our calculation we just need to add it to the consideration transferred. This article was written by a professional writer, copy edited and fact checked through a multi-point auditing system, in efforts to ensure our readers only receive the best information. As Pink Co shows a receivable of $4,600, then in Scarlett Co’s individual accounts there must be a corresponding payable of $4,600. Pink Co acquired 80% of Scarlett’s Co ordinary share capital on 1 January 20X2. The guidance in IFRS 10 is focused on when to prepare consolidated financial statements and how to prepare consolidated financial statements. When using computer spreadsheet software, remember to save your work often. I5O��R�����4nx3��DS��>��Tl�p�-�W5l���Z�J�/?+�. _U[&�����I�}� ����y�F���$$�i��房�p:pww�G� O �����V-�G��T�)�!d�+z�:0刱u$Af\C�TQtݒ1��@��7��W��XR�bO�ߐ��\K Q�x�q��s1ف/,��o��7��6��L��Y�k�j� �[F�ho��������V�K&D�x�b/�P���)$���d�qpR��J���g��W��K4Z�}c���3��Re�Mg��?

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