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1、5-1Part D Business CombinationTopic 1 Consolidated Statement of financial positionThe nature of business combinationWhat is a“group”?DefinitionsA parent is an entity that has one or more subsidiaries.A subsidiary is an entity that is controlled by another entity.Control is the power to govern the fi
2、nancial and operating policies of an entity so as to obtain benefits from its activities.Acquisition method:all groups are now consolidated using the acquisition method.5-2Part D Business CombinationTopic 1 Consolidated Statement of financial positionThe nature of business combinationAccounting issu
3、esIf one company owns more than 50%of the ordinary shares of another company this will usually give the first company control of the second company.The key principle underlying group accounts is the need to reflect the economic substance of the relationship.5-3Part D Business CombinationTopic 1 Cons
4、olidated Statement of financial positionExclusions from consolidationIAS 27 required that consolidated financial statements shall include all subsidiaries of the parent.There are two special cases however:The subsidiary meets the criteria to be classified as held for sale laid down in IFRS 5 NCA hel
5、d for sale and discontinued operations.This might occur when a parent has acquired a group with one or more subsidiaries that do not fit into its long-term strategic plans and are therefore likely to be sold.In these circumstances the parent has clearly not acquired the investment with a view to lon
6、g-term control of the activities,hence the logic of the exclusion.5-4Part D Business CombinationTopic 1 Consolidated Statement of financial positionExclusions from consolidationIAS 27 required that consolidated financial statements shall include all subsidiaries of the parent.There are two special c
7、ases however:It operates under severe long-term restrictions which are so serious that the parent has lost control over its investment.5-5Part D Business CombinationTopic 1 Consolidated Statement of financial positionExclusions from consolidationThe following table shows the treatment of exclude sub
8、sidiaries in the consolidated financial statements:Reason for exclusionAccounting treatmentLack of effective controlThe excluded subsidiary should be accounted for(as an investment)in accordance with IAS 39.Subsidiary held for resaleCurrent asset investment at the lower of carrying amount and FV les
9、s costs to sell.5-6Part D Business CombinationTopic 1 Consolidated Statement of financial positionBasic principle of consolidation financial statementA group comprise at minimum a parent company and a subsidiaryA subsidiary relationship exists where the parent company controls the subsidiary,control
10、 is normally achieved by the parent owning a majority(50%)of the ordinary share(voting rights)in the subsidiary.All business combination must be accounted for the Acquisition method.The pooling of interest method is prohibited.The basic rule with the parent and subsidiary financial statements is tha
11、t it shows all assets and liability.Intra-group items are excluded.5-7Part D Business CombinationTopic 1 Consolidated Statement of financial positionBasic format for consolidation SOFPSee attachment5-8Part D Business CombinationTopic 1 Consolidated Statement of financial positionExplanations of grou
12、p account-IFRS 3 BUSINESS COMBINATION(REVISED)Cost of investmentThe cost of investment is used to purchase the net assets of subsidiary.In general,to acquire a company is to acquire its net assets(equity).This must be accounted for at FV.The cost of acquisition includes the following elements.Cash p
13、aid/deferred cashShare for share exchangeFV of any other consideration,such as debenturesContingent considerations5-9Part D Business CombinationTopic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)1.1 Deferred consideration should be:D
14、iscounted at PV of future cash flowIncluding in non-current liability in Hs bookInterest on deferred consideration deducted from group reserve5-10Part D Business CombinationTopic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)1.2 Share
15、 for share exchange:Calculate the value of consideration(use the market price)Add extra share capital and share premium to group accountIssue cost should be deducted from proceeds of issue not included in the cost of acquisition.Professional fees and similar incremental costs incurred directly in ma
16、king the acquisition-all such costs should be expensed5-11Part D Business CombinationTopic 1 Consolidated Statement of financial positionExplanations of group account-IFRS 3 BUSINESS COMBINATION(REVISED)1.3 Contingent considerationThe reserve standard requires the acquirer to recognize the acquisition date FV of contingent consideration as part of the consideration for the acquire.Changes in FV of any contingent consideration after the acquisition date are also discussed in the standard.If the c
