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Advanced Financial Accounting: Chapter 2 Group Reporting I: Concepts and Context

16 Agu
•Advanced Financial Accounting: Chapter 2
•Group Reporting I: Concepts and Context
•Learning Objectives

Download Chapter 2 (Tan&Lee) 97

Understand:

1.The rationale for group reporting and the complementarity of reporting by legal and economic entities, and business units;
2.The economic incentives for the provision of consolidated financial information;
3.The economic context of group reporting – merger and acquisition as risk management strategy and the impact on financial reporting;
4.The concept of “control” and the determination of the parent-subsidiary relationship;
5.The concept of “significant influence” and the notion of “associates”
6.The concept of a “business combination” and the scope of IFRS 3;
7.The theories relating to consolidation; and
8.The effects of parent versus entity theories of consolidation
•Content
1.Introduction
2.Economic Incentive for the Preparation of Consolidated Information
3.Economic Motives for Entering into Intercorporate Arrangement
4.The Concept of Control
5.The Concept of Significant Influence
6.Accounting for Business Combinations
7.Consolidation Theories
•Introduction
•A primary issue that underpins financial reporting is the identification of the reporting entity.

 

•Introduction
•Introduction
•Introduction
•A group of companies better able to deal with economic risk like
–Macro-economic risk
–Industry risk
–Firm-specific risk
•Corporate acquisition and diversification may be sub-optimal and value-destroying if
–Motivate by managers’ self-interest to invest in size rather than value (Jensen, 1986, Shelefier and Vishny, 1990)
–Costs and risks that arise from acquisition strategies, particularly in unrelated diversification
•Synergistic benefits potentially reduced by direct and indirect costs arising from these strategies
•Introduction
•Introduction
•Content
1.Introduction
2.Economic Incentive for the Preparation of Consolidated Information
3.Economic Motives for Entering into Intercorporate Arrangement
4.The Concept of Control
5.The Concept of Significant Influence
6.Accounting for Business Combinations
7.Consolidation Theories
•Information Perspective
•Managers with a comparative advantage on information are compensated for their ability to provide information on the future cash flows of these firms (Holthausen and Leftwish, 1983)
•Efficient Contracting
•Whittred (1987) suggests that consolidated information improves wealth for firms
•Reduced information asymmetry between lenders and borrowers
–Lenders fear that borrowers will transfer assets to related companies
–Borrowers expropriate a considerable larger sum than what they stand to lose because of limited liability
•Hence, lenders required cross-guarantees issued by parent companies. Whittred suggests a set of consolidated financial statements performs the same function as a “cross guarantee”
•Opportunism
•Consolidated financial statements lead to wealth transfers to managers at the expense of other stakeholders if the acquisition is motivated by managerial self-interest
–Managers enjoy higher compensation, perks and power through managing a larger group
–Managers are more likely to over-invest in companies that are specific and complementary to their skills
•Information asymmetry may arise by masking financial problems of individual companies within the group
•Content
1.Introduction
2.Economic Incentive for the Preparation of Consolidated Information
3.Economic Motives for Entering into Intercorporate Arrangement
4.The Concept of Control
5.The Concept of Significant Influence
6.Accounting for Business Combinations
7.Consolidation Theories
•Economic Incentives for Entering into Intercorporate Arrangement
•Economic Incentives for Entering into Intercorporate Arrangement
•Economic Incentives for Entering into Intercorporate Arrangement
•Investing Strategies, Ownership Levels and the Impact on Financial Reporting
•Content
1.Introduction
2.Economic Incentive for the Preparation of Consolidated Information
3.Economic Motives for Entering into Intercorporate Arrangement
4.The Concept of Control
5.The Concept of Significant Influence
6.Accounting for Business Combinations
7.Consolidation Theories
•The Concept of Control
•The Concept of Control
•Direct and Indirect Control
•For the test of control, IAS 27 requires consideration of the percentage of voting rights held “direct or indirectly through subsidiaries”
•Control must be demonstrated at each intermediate level before the ultimate holding company is said to have control over the lowest-level company
•Legal Ownership versus Effective Control
•IAS 27 is principles-based, and all evidence must be considered for the existence of control
•IAS 27 requires potential voting rights, which are currently exercisable or convertible, to be considered when determining the existence of control
•IAS 27:14: Potential voting rights arise from “share warrants, share call options, debt or equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the entity voting power or reduce another party’s voting power over the financial and operating policies of another entity

 

•Potential Voting Rights in the Determination of Control
•IAS 27:15: In determining whether potential voting rights contribute to control, the investor examines all facts and circumstances, such as terms of exercise of the potential voting rights and any other contractual terms, but not the intention of management and the financial ability to exercise or convert
•It is important that the potential voting rights must be currently exercisable or convertible to be included in the test of control
•Potential Voting Rights in the Determination of Control
•Potential Voting Rights in the
Determination of Control
•Impact of Potential Voting Rights
on the Allocation of Profits
•IAS 27:19: The proportion of profit or loss and changes in equity allocated to the parent and non-controlling interests are determined on the basis of present ownership interests and do not reflect the possible exercise or conversion of potential voting rights”.
•However, if the potential voting rights, in substance, gives the holder access at present to the economic benefits associated with an ownership interest should be considered( IAS 27:IG 5-6)
•Content
1.Introduction
2.Economic Incentive for the Preparation of Consolidated Information
3.Economic Motives for Entering into Intercorporate Arrangement
4.The Concept of Control
5.The Concept of Significant Influence
6.Accounting for Business Combinations
7.Consolidation Theories
•The Concept of Significant Influence
•An investor may participate in the policy-making processes of an investee, although they may not have the power to govern the final outcome
•IAS 28 describes such an investor as having “significant influence”, and the investee is deemed an “associate” of the investor
•Special accounting procedures described as the “equity method” are applied
•What is Significant Influence?
•Direct and Indirect Significant Influence
•Content
1.Introduction
2.Economic Incentive for the Preparation of Consolidated Information
3.Economic Motives for Entering into Intercorporate Arrangement
4.The Concept of Control
5.The Concept of Significant Influence
6.Accounting for Business Combinations
7.Consolidation Theories
•Accounting for Business Combinations
•Overview of the Scope of the IFRS 3
•Objective of IFRS 3
–Specify the requirements governing the method of accounting, disclosure and presentation of the financial statements of a reporting entity comprising one or more separate entities that are brought together in a business combination

 

•Purchase of Net Assets versus
Purchase of Equity
•Parent – Subsidiary relationship
•Separate legal entities

– separate FS

•Single reporting entity

– Consolidated FS

•Content
1.Introduction
2.Economic Incentive for the Preparation of Consolidated Information
3.Economic Motives for Entering into Intercorporate Arrangement
4.The Concept of Control
5.The Concept of Significant Influence
6.Accounting for Business Combinations
7.Consolidation Theories
•Consolidation Theories
•Theories relating to consolidation are critical when the percentage of ownership in a subsidiary is less than 100%
•Termed “partially owned subsidiary”, where the remaining percentage is owned by shareholders who are collectively referred to as “non-controlling interest” (NCI)
•Consolidation Theories
•Consolidation Theories
•Comparison of issues
•Comparison of issues
•Summary of differences
•Proprietary Theory
•Relevant to accounting for joint venture
•Parent seen as having a direct interest in a subsidiary’s assets and liabilities
– resulting in proportional consolidation.
•The Implicit Consolidation Theory Underlying IFRS 3
•Previously, IAS 22 allowed an acquirer to either recognize or ignore non-controlling interests’ share of fair value adjustments of a subsidiary’s identifiable assets and liabilities
•IFRS 3 (2008) permits the recognition of non-controlling interests’ share of goodwill
•Movement towards the full entity theory
•Illustration 1:  Parent versus Entity Theory

Scenario

•Consideration transferred: $1,200,000
•NCI: 20%
•BV of equity at acquisition date (1/1/20×1): $1,200,000
•(FV – BV) of property: $100,000

(Ignore tax effect and depreciation)

•FV of NCI: $300,000
•BV of equity at 31/12/20×1: $1,270,000

 

•Illustration 1:  Parent versus Entity Theory

Goodwill

 

•Illustration 1:  Parent versus Entity Theory

Presentation of NCI

 

Non-controlling interests are shown separately from equity

 

 

 

Non-controlling interests are deemed to have an equity interest and are thus presented as a component in equity

 

 
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Ditulis oleh pada 16/08/2012 in AKL

 

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