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