Beruflich Dokumente
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BUSINESS COMBINATION AND GROUP FINANCIAL STATEMENTS (MFRS 3 & MFRS 10)
LEARNING OUTCOMES
Explain regulatory requirement for consolidation and exemption from liquidation Explain basic structure of parent-subsidiary relationship To record consolidation at acquisition date.
INTRODUCTION
Business combination as a transaction or other event in which an acquirer obtains control of one or more businesses. (MFRS 3: B5) An acquirer might obtain control of an acquiree in a variety of ways, for example:
(a) by transferring cash, cash equivalents or other assets (including net assets that constitute a business); (b) by incurring liabilities; (c) by issuing equity interests; (d) by providing more than one type of consideration; or (e) without transferring consideration, including by contract alone (see paragraph 43).
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INTRODUCTION
Group
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 entity.
REGULATORY FRAMEWORK
MFRS 3 - Business Combinations MFRS 10 Consolidated Financial Statements MFRS 127 Separate Financial Statements
MFRS
Strd Title Effective Date 1 Jan 2012 1 Jan 2012 Issuance Date 19 Nov 2011 19 Nov 2011
MFRS 3
Business Combination
MFRS 10
19 Nov 2011
MFRS 127 Separate Financial 1 Jan 2013 Statements (IAS 27 as amended by IASB in May 2011)
19 Nov 2011
* Will be superseded by MFRS 127 Separate Financial Statements (IAS 27 as amended by IASB in May 2011) and MFRS 10 Consolidated Financial Statements with effect from 1 Jan 2013
Require every holding company to annex a consolidated profit and loss accounts to its profit and loss account, and a consolidated balance sheet to its balance sheet. Parent-subsidiary relationship: Section 5 (1), Section 5 (2), Section 5 (3)
Section 169 (requirements of financial statements), Section 169(15) (present FS in AGM), Section 168 (financial year of subsidiary companies must coincide with the financial year of holding company)
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MFRS 10
MFRS 10
An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee(para 6) Power - existing rights that give the current ability to direct the relevant activities (Appendix A).
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An investor controls an investee if and only if the investor has all the following:
a) power over the investee (see para 1014); b) exposure, or rights, to variable returns from its involvement with the investee (see para 15 and 16);and c) the ability to use its power over the investee to affect the amount of the investors returns (see para 17 and 18).
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ii.
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A business combination may result in a parentsubsidiary relationship in which the acquirer is the parent and the acquiree a subsidiary of the acquirer (MFRS 3, Para 6).
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business combinations in which one entity obtains control of another entity but for which the date of obtaining control (ie the acquisition date) does not coincide with the date or dates of acquiring an ownership interest (ie the date or dates of exchange).
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Limitation:
Non-controlling interest s/h & creditor of subsidiary LHDN CFS may not reveal some info Maybe not meaningful if dissimilar activities May mislead to unsophisticated readers.
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MFRS 3 (para1) specifies that all business combinations should be accounted for by applying the acquisition method. Views a business combination from the perspective of the acquirer. The acquirer purchases net assets and recognizes the assets acquired and liabilities and contingent liabilities assumed, including those not previously recognized by the acquiree. The acquirer records the assets and liabilities at fair values.
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Identifying an acquirer
The acquirer is the combining entity that obtains control of the other combining entities or businesses.
the date on which it obtains control of the acquiree. generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquireethe closing date.
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the cost of the business combination: the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree;
Acquisition-related costs are treated as acquisition expenses (MFRS 3:para 53) include finders fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities.
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allocate the cost of the business combination to the assets acquired and liabilities and contingent liabilities assumed (include assets and liabilities that the acquiree had not previously recognised as assets and liabilities in its financial statements (eg: brand name)
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Cost incurred that were directly attributable to the acquisition totaled RM500,000 and these have not been paid. The cost of registration for issuing shares is RM100,000 paid by cash. ABCs incremental borrowing cost was 8% per annum.
Required: Calculate the cost of investment and record the related journal entry.
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Journal Entry (ABC Bhd): DR Investment in Subsidiary - WXY 6,715,000 CR Cash 1,000,000 CR Deferred liability 1,715,000 CR Share capital, at par 1,000,000 CR Share Premium 3,000,000 (to record investment in subsidiary company at cost)
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At the date of acquisition, the net asset values of the subsidiary must be stated at their fair values to the parent.
Consolidated adjustments are necessary to revise book values to the fair values. Thus, the revalued amounts of the net assets represent cost to the parent.
Pre-acquisition Adjustments
parent's investment in the subsidiary (as stated by purchase consideration) is cancelled and substituted by the underlying fair value of the net assets of the subsidiary so that net assets of both companies are added across and presented in aggregates to avoid double-counting in the group accounts.
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the investment in subsidiary account (the purchase consideration) is cancelled against the share capital and pre-acquisition reserves of the subsidiary leaving the balanced as goodwill on acquisition.
Dr. Share Capital Dr. Pre-acquisition reserves Dr. Goodwill Cr. Investment in Subsidiary xx xx xx xx
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Preparing group accounts of a parent immediately after it has acquired a subsidiary (as at the date of acquisition) Consolidation Procedure:
1. the investment in subsidiary account (COI)
is cancelled against the share capital and pre-acquisition reserves of the subsidiary.
subsidiaries are combined on a line-by-line basis by adding together asset, liabilities, equity, revenue & expenses.
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Non-Controlling interest
Reserves
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GOODWILL
The differences between COI, non-controlling interest (NCI) and the net fair value of the identifiable assets, liabilities and contingent liabilities(NIA) recognised in accordance with Para 36.
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GOODWILL (CONT..)
recognise goodwill acquired in a business combination as an asset; and initially measure that goodwill at its cost, (MFRS 3, Para. 51)
After initial recognition, the acquirer shall measure goodwill at cost less any accumulated impairment losses. (MFRS 3, Para. 54)
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GOODWILL (CONT..)
Example 2:
Refer example 1, the statement of financial position of WXY SB as at 1 January 2013 was as follows:
Property, Plant & Equipment Net current assets Long term loans
GOODWILL (CONT..)
Example (cont..)
All items are recorded in the accounts are assumed to be recorded at fair values. Required: Allocate the cost of the acquisition to the identifiable net assets of WXY SB and calculate the goodwill on consolidation .Prepare consolidation journal entries at acquisition date.
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GOODWILL (CONT..)
Solution:
COI, as recorded in ABC Bhds accounts(000) Allocated to net assets (000): Fair value of net assets (5,000) 6,715
Goodwill on consolidation
1,715
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GOODWILL (CONT..)
Consolidation journal entry:
DR Share Capital 2,000 DR Reserves 3,000 DR Goodwill on consol 1,715 CR COI 6,715 (to eliminate COI and to recognize GOC)
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reassess the identification and measurement of the acquirees identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; (para 36) recognise immediately (a gain) in profit or loss any excess remaining after that reassessment.(MFRS 3, Para 34)
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The indentifiable assets & liabilities of the acquired entity should be restated to fair value (acquisition date)
The consolidation journal entries depend on whether or not the subsiadiary has made the required adjustments in its own books.
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Example 3:
Refer example 1, the Balance Sheet of WXY SB as at 1 January 2013 was as follows:
Share Capital of RM1.00 each Reserves Property, Plant & Equipment Net current assets Long term loans
Included in the fixed asset of WXY SB was a freehold property at cost of RM1,000,000. At January 1 2013, this property had an open market value of RM2,000,000. Also, other identifiable assets (granite extraction rights) worth RM500,000 as at 1 January 2013 were not reflected in the accounts.
All other items recorded in the accounts are assumed to be recorded at fair values. Required: Allocate the cost of the acquisition to the identifiable net assets of WXY SB and calculate the goodwill on consolidation . Show the adjustments to consolidate WXY SB.
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DR
(to adjust book value of net assets to fair value at acquisition date)
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6,500,000 215,000
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NON-CONTROLLING INTEREST
Exists when the acquirer (Parent) has less than 100% interest in subsidiary. Example: If parent acquired 70% interest in subsidiary, the NCI would be 30%. any non-controlling interest in the acquiree is measured either: (para 19) a) at fair value or, b) at the non-controlling interests proportionate share of the acquirees identifiable net assets.
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NON-CONTROLLING INTEREST
(cont)
Example 4:
Refer example 1, assuming that ABC acquired 80% interest in WXY Bhd for RM5,100,000 and fair value of the remaining 20% interest was RM1,275,000.
Required: Prepare the relevant consolidation journal entries at acquisition date using both methods for the treatment of NCI.
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NON-CONTROLLING INTEREST
(cont)
Solution:
NCI at % of net assets COI NCI (*20% x 5,000,000) FV of net identifiable assets Goodwill on consolidation 5,100,000 *1,000,000 NCI at fair value 5,100,000 1,275,000
6,100,000 5,000,000
1,100,000
6,375,000 5,000,000
1,375,000
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NON-CONTROLLING INTEREST
(cont)
Method: NCI at proportionate share of net assets Dr Share capital (80% x 2,000,000) Reserves (80% x 3,000,000) Goodwill Cr COI Dr Share capital (20% x 2,000,000) Reserves (20% x 3,000,000) Cr NCI 1,600,000 2,400,000 1,100,000 5,100,000 400,000 600,000 1,000,000
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NON-CONTROLLING INTEREST
(cont)
Method: NCI at fair value: Dr Share capital (80% x 2,000,000) Reserves (80% x 3,000,000) Goodwill Cr COI Dr Share capital (20% x 2,000,000) Reserves (20% x 3,000,000) Goodwill Cr NCI 1,600,000 2,400,000 1,100,000 5,100,000 400,000 600,000 275,000 1,275,000
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RESERVES
Reserves could be categorized into two which are capital reserve and revenue reserve. In preparing CFS, reserves need to be differentiated into 2, that are:
1. Pre-acquisition arise in subsidiarys account
at the acquisition date. It is not belong to the parent. Need to be eliminated each time when preparing CFS.
subsidiary after the date of acquisition. Parent has share in this reserve as its % of ownership interest in the subsidiary.
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RESERVES (CONT..)
Example 5:
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RESERVES (CONT..)
Solution:
Pre-acquisition Post-acquisition Reserve (RM) Reserve (RM) Retained Earning Revaluation Reserve 20,000 10,000 10,000 5,000
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CONSOLIDATION OF ACCOUNTS
Example 6:
Naga Bhd acquired an 80% interest in Garuda Bhd on 31 December 2012. The acquisition was paid in cash RM300,000 and issued 600,000 new ordinary shares of Naga Bhd for RM1.50 per share with par value RM1.00. The balance sheet of both company before the date of acquisition are as follow:
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Prepare the consolidation journal entries as at 31 December 2012. Prepare a consolidated statement of financial position as at 31 December 2012.
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c)
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