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3. Consolidation

Definition of consolidation:

process of preparing FS for group entities

Consolidation involves...

combining financial statements of individual entities

Purpose of consolidation:

present a set of FS as if all entities wihtin a group are one entity

Why is consolidation so important?

If you don't use right scope of consolidation, it may lead to potential abuses f.e. Enron

Under IFRS ... , the criterion for consolidation is ...

10, control

Definition of control (3)

1. power over the investee
2. exposure or rights to variable return from involvement

3. the ability to use its power to affect the return

Definition power:

existing rights that give the current ability to direct the relevant activities

power arises from rights which generally arise from ...

a legal contract

Power includes:

Voting rights, right to appoint managment, right to appoint another entity that participates in management, right to determin important decisions

potential voting rights held bu the entity are included if ...

they are substantive and represent a current ability to exercise

Power requires ...

the ability to direct

Power over activities are only relevant if ...

these are relevant activities that are being directed and significantly affect the investee's return

Power is presumed to exist when ...

an investors owns more than 50% of the voting rights of an entity

De facto control definition:

voting rights are > 50%, this can result in an investor having power over an investee

The following factors need to be considered when assessing whether there is power of the investors:

1. Dispersion of the other shareholders
2. Attendance at AGM's

3. Existence of contracts

When is it necessary to adjust the subsidiary's FS

BS is different, accounting policies are different, fair values versus book values, different currency

Which adjustments need to be made during a consolidation?

1. BC valuation entries (adjust carrying amounts to fair value)
2. Pre-acquisition entires

3. Transactions between groupentities

What is the goal of consolidation accounting?

avoid double accounting for transactions

Acquisition analysis definition:

acquisition analysis compares the cost of acquisition with the FVINA to determine whether there goodwill or bargain purchase

FVINA definition

all identifiable assets and liabilities of the subsidiary as well as the FV of contingent liabilities of the acquiree

Contingent liabilities are recognized on the BS of the ...

acquirer on the acquisition of the subsidiary, not recognized on subsidiaries BS

BCVR definition

it is used to record adjustments in FV vs BV, unrecognized assets, and contingent liabilites at FV

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