topic4a-consolidated balance sheet
TRANSCRIPT
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INTRODUCTION
Business Combination
Acquisition
Purchase net assets
Acquire assets and liabilities Amalgamation/absorption
(Chap5)
Acquire control
Acquire share capital
Parent and Subsidiary
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1. PARENT AND SUBSIDIARY
Holding/ Parent/ Investor
S1
55%
S1
55%
S1
55%
S1
55%
S1
55%
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Sec 5 of the CA1965 defines a subsidiary company as one:
In which the investor company
Controls the composition of the BOD of the investee company; @
Controls >50% of the voting power; @
Holds >50% of the issued share capital (excluding PSC); @
It is a subsidiary of a subsidiary of the investor company
Definition of Subsidiary
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FRS 127 Consolidated and Separate FS defines control as ³the
power to govern the financial and operating policies of an enterpriseso as to obtain benefits from its activities´
Control
Control is presumed to exist when:
The investor owns, directly @ indirectly , >50% of the voting power
The investor has options @ warrants ± may give an increase in its votingpower @ reduce the voting power of the other investors in the common
investee.
Situations where control is present even though the voting power is <50%
Power of >50% of the voting rights by an agreement with other investors
Power to govern the financial n operating policies under statute@agreement
Power to appoint@remove the majority of the members of the BOD
Power to cast the majority of votes at meetings of the BOD
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Other indications to identify an acquirer / investor
The one whose fair value is the larger than the other combiningentity
The entity giving the purchase consideration; likely to be theacquirer
The one whose management team is able to dominate the other entity
When a new entity is formed to effect a business combination, theacquirer cannot be the new entity but must be the one of the existedentities before the business combination
The one who issues the shares where the purchase price is settledin share exchange
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2. NEED TO PREPARE CONSOLIDATED FS
The holding company has to prepare a set of FS for the group, i.e.; theconsolidated FS
Consolidated balance sheet
Consolidated income statement
Statement of changes in equity
Consolidated cash flow statement
The CA1965 and the FRS require the holding company to prepare theconsolidated FS along with its FS; i.e.; two sets of FS
As a separate legal entity-show its acquisition of shares as a LT investments Consolidated FS-all items in BS and IS are combined to form one set of FS
as though the holding and the subsidiary, together, are one entity
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Exempted from Preparing Consolidated FS
The Ninth Schedule of the CA 1965 exempts a wholly owned parent
company from preparing consolidated FS
FRS 127 exempts a parent from preparing consolidated FS when:
The parent itself is a wholly owned subsidiary, or is a partially owned
subsidiary and the other owners do not object it not presenting
consolidated FS
Its debt or equity instruments are not traded in a public market (not a
PLC)
The ultimate or any other intermediate parent produces consolidatedFS
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Diagram A Diagram B
H Bhd H Bhd
SS
SS
SS
100%
90%90%
90%
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3. EXCLUSION FROM CONSOLIDATION
The Ninth Schedule of the CA1965 allows parent companies to exclude
certain subsidiaries from being consolidated
Temporary controlling interest in the subsidiary
The subsidiary is situated in the foreign country The accounts would be misleading @ harmful to any member of the group
The business is very different from the parent company
FRS 127 allows non-consolidation of a subsidiary only when the parent
losses control over a subsidiary
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4. GROUP STRUCTURE
Vertical Group
H Bhd
S
80%
SS60%
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Mixed Group
S SS
H
B
25%75%
P
C
30%
D
60%
30%
55%
40%
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5. CONSOLIDATION METHOD
Purchase / acquisition method
The purchaser recognizes the cost of the businesscombination, the assets acquired and the
liabilities.Cost is usually shares bought-shares referred toas investment.
The parent company records it as non-currentasset.
The value at which investment is recorded is theamount paid or the fair value of assets and otherconsideration.
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STEPS IN THE PURCHASE
Identifying the acquirer
Measuring the cost of business combination
Allocating the cost of business to the fair value of net assets to determine the goodwill.
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Identifying the acquirer
This is the entity that obtains the control of theother combining entities.
The acquirer =purchaser
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Measuring the cost of businesscombination The cost of the business combination
=cash given+ fair value of consideration +incidental costs incurred.
Cost of the business combination includes:
The fair value of the considerations given : assets, Liabilitiesincurred/ assumed, Equity instruments issued. All aremeasured at fair value.
� Deferred liabilities- discounted to present value .
� Published equities ±the published price at the date of
acquisition.
Costs directly attributable to the acquisition.� Do not include the cost of arranging or issuing liabilities or
equities.
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Allocating the cost of business to the fair value of net assets to determine the
goodwill.
If the agreement includes an adjustment tothe purchase consideration contingent on
future events then cost should include theadjustment if it is probable and can bemeasured reliably.
non-current assets are taken at fair valueless cost to sell.
Restructuring cost is not a liability-unlessthere is an obligation to restructure at thedate of acquisition.
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T he recognition criteria for assets andliabilities
Assets other than intangible: Fair value can bemeasured reliably and future economic benefit is
probable Intangible assets: Fair value can be measured reliably.
good will from in-process research and that fromdevelopment costs -separately recognize if the project
meets the definition of intangible assets.
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T he recognition criteria for assets andliabilities(cont·d.)
Liabilities other than contingent liability: Fair value canbe measured reliably and are probable obligations.
Contingent liabilities:
recognized only if the fair value can be recognizedreliably. Investigation by a governmental agency orpayment of unusual fines or penalties.
� Contractual payments are probable and thusrecognized as contingent liabilities and taken into the
cost of the business combination� Large payments for unspecified services.
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GOODWILL
excess of the cost of combination over the fair valueof the identifiable assets and liabilities of thebusiness combination at the date of acquisition.
Goodwill=purchase price ² fair value of the assets
and liabilities.
Can be a positive /negative goodwill.
Positive :
� recognized as an asset and measured at cost.
� Impaired annually or more frequently.
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GOODWILL (Cont·d)
Negative
� Reassess the identification and measurement of
the assets, liabilities and contingent liabilities ofthe acquirer.
� Reassess the cost of business combination.
� Recognize the excess remaining immediately as
gain in the profit and loss account.
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6. ADJUSTMENTS TO COST OF BUSINESS OR
F AIR VALUE OF THE NET ASSETS
Cost determined provisionally:-initial accounting isbased on these values
Any adjustment must be done within one year
Goodwill has to be adjusted with adjustments todepreciation and amortization if fair values differ fromprovisional values.
If adjustments be made after one year-FRS 108, Accounting for changes in accounting estimates and
error.
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ADJUSTMENTS TO COST OF BUSINESS OR
F AIR VALUE OF THE NET ASSETS (Cont¶d)
Deferred tax
� If deferred tax asset or carried forward tax losses does
not meet the recognition criteria then treated as income.
� The carrying amount of goodwill will be reduced to the
amount that is recognized when tax is recognized as an
asset.
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7. WHEN BUSINESS COMBINATION IS
ACHIEVED IN STAGES
Treat each transaction separately.
Goodwill determined for each acquisition.
Requirements:
� Approval of shareholders.� Approval of Securities Commission.
� FRS3 Business Combinations
The effective date of acquisition is the date on whichcontrol of the net assets and operation is effectivelytransferred to the acquirer .
If the acquisition is through a public offer then date is onreceipt of a sufficient number of acceptances.
For private companies it is the date when unconditionaloffer is accepted
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8. MEMBERSHIP OF HOLDING COMPANY
Subsidiaries cannot hold shares in parent
company
If hold before become subsidiaries, then have to
dispose within 12 month, or longer
Subsidiary cannot vote at the meeting of the
parent company
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9. GROUP FINANCIAL STATEMENTS
Holding company must draw up consolidated
financial statement
To exclude all inter-company transactions and
balances
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10. ACCOUNTING DATE FOR GROUP COMPANIES
Financial year of the subsidiaries must coincide with theholding company within 2 years after becoming thesubsidiaries
Director of the parent company may apply to CCM to
authorize the subsidiaries to continue with their financialyear .
But the difference must not more than 3 months
Adjustments must be made for all significant transactionsor events that occur between those date
Parent company and all its subsidiaries must apply theaccounting policies according to FRS 127
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12. INFORMATION REGARDING SUBSIDIARIES
NAMES
PLACE OF INCORPORATION
PRINCIPLE ACTIVITIES
THE PERCENTAGE OF THE
ISSUED CAPITAL HELD BY
THE HOLDING COMPANY
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13. DISCLOSURE
The following information need to be disclosed in the
consolidated FS:
1. LISTING OF EACH SUBSIDIARY, NAME OF SUBSIDIARY, COUNTRY OF CORPORATION,
PRINCIPLE ACTIVITIES AND PROPORTION OF
OWNERSHIP INTEREST
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IF
DIFF
ERENT OF
PROPORTION OF
VOTING POWER EXIST,FOLLOWING WILL ALSO BE INCLUDED:
REASONS NOT CONSOLIDATING A SUBSIDIARY;
NATURE OF THE RELATIONSHIP BETWEEN THE PARENT
AND A SUBSIDIARY- PARENT HOLDS < 50% OF THE VOTINGPOWER;
NAME OF AN ENTERPRISE WHERE > THAN 50% OF THEVOTING POWER IS HELD BUT THERE IS ABSENCE OF CONTROL; AND
EFFECT OF THE ACQUISITION OR DISPOSAL OF SUBSIDIARIES ON THE FINANCIAL RESULTS AND POSITION
AT THE REPORTING DATE.
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2. IN THE PARENT¶S SEPARATE FS, THE
DESCRIPTION OF THE METHOD USED
TO ACCOUNT FOR SUBSIDIARIES.