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ACC2115-MODULE 6

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Omura Yoshinari

on 11 June 2015

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Transcript of ACC2115-MODULE 6

Adjustment on Consolidation
The assets of the subsidiary are adjusted to the fair values on consolidation
The differences being recorded in the business combination valuation reserve (BCVR)‏
The BCVR is then deemed to be part of the equity acquired
NOTE: the BCVR account is ONLY used when recognised the change in FV of an asset via the consolidation worksheet

--If the subsidiary chooses to recognise the change in FV in its own books it will do so using the Asset Revaluation Surplus a/c (as per Module 4)

Why do we use the “Transfer from BCVR” account?
Need to determine if goodwill or a gain on bargain purchase exists at the acquisition date
--Determine the net fair value of identifiable assets,
liabilities and con tingent liabilities of the
subsidiary
--Determine the consideration transferred
--Goodwill (where consideration > FVINA)
OR
--Gain on Bargain Purchase (where consideration < FVINA)


The ‘consolidation worksheet’ entries are not affecting the actual books of either entity, they are a manual adjustment for the purposes of preparing the consolidated financial statements.
Any adjustments in the consolidation worksheet that affect Revenues, Expenses, Dividends, and Transfers to/from Reserves in any CURRENT YEAR have the affect of adjusting the RE (closing balance) for that year in the consolidated financial statements.
Therefore, these adjustments must be ‘manually’ carried over to the NEXT YEAR as an adjustment to the next year’s RE (opening balance) in the cons. fin. stmts.

Worksheet entries at 1 July 2016
1. Business combination valuation entries
Inventory Dr 6 400
Deferred tax liability Cr 1 920
Business combination valuation reserve Cr 4 480
Patent Dr 12 000
Deferred tax liability Cr 3 600
Business combination valuation reserve Cr 8 400
Accumulated depreciation - Plant Dr 40 000 Plant Cr 40 000
Plant Dr 8 000 Deferred tax liability Cr 2 400
aaa
Business combination valuation reserve Cr 5 600
Goodwill Dr 7 520
aaa
Business combination valuation reserve Cr 7 520


Step 1: BCVR entries on 1 July 2016: Q19.6
2. Pre-acquisition entries
 At 1 July 2016:
Retained earnings (1/7/16) Dr 68 800
Share capital Dr 80 000
Business combination valuation reserve Dr *26 000
Shares in Jeff Ltd Cr 174 800

Step 2:Pre-Acquisition elimination entries on 1 July 2016 Question 19.6
MODULE 6
COMPANY CONSOLIDATIONS

Step 2: Pre-acquisition Elimination entry
Pre-Acquisition Elimination entry:

Eliminate the subsidiary’s equity as it now belongs to another entity within the group - the Parent.

DR subsidiary’s equity accounts
Eliminate the carrying amount of the parent’s investment as it is an investment with another entity in the group – the Subsidiary.

CR Investment in Subsidiary account
Group equity then reflects only equity transactions with external parties.
That is, if the parent owns 100% of the subsidiary then the group equity will only include the parent’s equity (it is the only equity in the group owned by external parties)
Step 0: Acquisition analysis for Question 19.6
Question 19.6
Mutt Ltd – Jeff Ltd
At 1 July 2016:
Net fair value of identifiable assets BCVR
and liabilities of Jeff Ltd = ($80 000 + $68 800) (equity)

+$6 400 (1 – 30%) (inventory) 4 480
+ $12 000 (1 – 30%) (patent) 8 400
+ $8 000 (1 – 30%) (plant) 5 600
= $167 280 18 480
Consideration transferred = $174 800
Goodwill = $7 520 7 520
26 000


Step 1- BCVR entries 30 June XX (the following years)
When an asset is fully depreciated or sold to an external party the BCVR that was recognised upon its revaluation no longer exists. The amount in BCVR for that asset needs to be transferred over to the Retained Earnings account.
In the books of an entity, the closing balance of the RE account is calculated as:
RE (opening)
+/- Profit (Loss)
- Dividends Paid or Declared
+/- Transfers from/to Other Reserves
= RE (closing)
The consolidation worksheet entries are not affecting the actual books of either entity, they are a manual adjustment for the consolidated financial statements.

Step 1- BCVR entries- what to adjust
Depreciable asset

Always write back any existing accumulated depreciation at date FV changed.
THEN, record the increase in value from Carrying Amount to Fair Value
Each year you need to adjust for more depreciation expense on the increased amount as the subsidiary is still recorded depreciation based on the original amount
Any adjustments to the Depreciation Expense or ITE accounts in a current year must be carried over into Retained Earnings in the following years.

Step 1- BCVR entries- what to adjust..
Inventory
At the end of the first financial year take note of:
⇒How much of the inventory is still on hand?
⇒How much of the inventory has since been sold
aaaaaa
to external parties?

When the asset is either fully depreciated or sold to an external party the BCVR no longer exists and must be transferred over to Retained Earnings via the “Transfer from BCVR” account.

Step 2 Pre-acquisition elimination entries:
Increases in FV of assets result in the recognition of a new Equity account – BCVR – recognised in the consolidation worksheet. This new equity account must also be eliminated via the pre-acqn elimination entry.
Any Transfer from BCVR needed in the BCVR entries must be reversed out in the pre-acqn entry.
--The Transfer from BCVR account is a temporary account used to
transfer funds from the BCVR account to the RE account.
A Gain on Bargain Purchase is a Revenue account which needs to be carried over into Retained Earnings in the following years.
Equity transfers in the book s of the Subsidiary
--E.g. Transfer to General Reserve (it’s coming out of RE)

Q19.6 what to watch out for.......
Question19.6
- the sale of the inventory - the depreciation of the equipment (see next slide) -the impairment of the goodwill (see next slide)

Step 1: BCVR entries 30 June 2017Question 19.6
2. Worksheet entries at 30 June 2017

Business combination valuation entries The entries at 1 July 2016 are affected by: -
the sale of the inventory - the depreciation of the equipment
(see next slide)
-the impairment of the goodwill
(see next slide)

Cost of sales Dr 6 400
Income tax expense [6400*0.3] Cr 1 920
Transfer from BCVR [6400*0.7] Cr
*4 480 (see slide #17)
Patent Dr 12 000
Deferred tax liability Cr 3 600
Business combination valuation reserve Cr 8 400
[Same entry for Patent because Patent has not changed from 1 July 2016]

Step 1: BCVR entries 30 June 2017Question 19.6 (cont.)
Accumulated depreciation - equipment Dr 40 000 Plant Cr 40 000
Plant Dr 8 000 Deferred tax liability Cr 2 400
Business combination valuation reserve Cr 5 600 Depreciation expense Dr
800
Accumulated depreciation Cr
800
(10% x $8 000)
Deferred tax liability Dr
240
Income tax expense Cr
240
(30% x $8 000)
Goodwill Dr 7 520
Business combination valuation reserve Cr 7 520
Impairment loss – goodwill Dr
1 200
Accum. impairment losses – goodwill Cr
1 200

Step 2: Pre-Acquisition entries 30 June 2017Q19.6
2. Pre-acquisition entries:
The entries at 1 July 2016 are affected by:
-General reserve is recognised at 12 000
-
the sale of the inventory
 At 30 June 2017:
Retained earnings (1/7/16) Dr 68 800
Share capital Dr 80 000
Business combination valuation reserve Dr 26 000
Shares in Jeff Ltd Cr 174 800

General reserve Dr 12 000
Transfer to general reserve Cr 12 000
Transfer from BCVR Dr
*4 480 (see slide 15)
BCVR Cr 4 480

Step 0: Acquisition Analysis
Question 19.11: Previous equity interest; & Gain on Bargain Purchase
Step 1: BCVR entries Q19.11 on 1 July 2014
Step 2: Pre-Acquisition elimination entries Question 19.11 on 1 July 2014
2. Pre-acquisition entries
 At 1 July 2014:
Retained earnings (1/714) Dr 36 000
Share capital Dr 54 000
Asset revaluation surplus Dr 18 000
Business combination valuation reserve Dr 2 450
Gain on bargain purchase Cr 450
[P/L at acquisition date: carried over to RE in subsequent years]
Shares in Darren Ltd Cr 110 000

Consolidation 3 Steps:
Step 0: Acquisition Analysis
Step 1: BCVR entries
Step 2: Pre-acquisition Elimination entry

Goodwill (Q19.6)

Gain on Bargain Purchase (Q19.11)
Worksheet entries at 1 July 2014
1. Business combination valuation entries:
Inventory Dr 2 000
Deferred tax liability Cr 600
Business combination valuatio n reserve Cr
1 400
Accumulated depreciation – Machinery Dr 7 500
Machinery Cr 7 500
Machinery Dr 1 500
Deferred tax liability Cr 450
Business combination valuation reserve Cr
1 050

Question 19. 11
Ethan Ltd – Darren Ltd
1 July 2014 BCVR
Net fair value of identifiable assets
and liabilities of Darren Ltd = ($54 000 + $36 000 + $18 000) (equity)
+ $1 500 (1 – 30%) (plant) 1 050
+ $2 000 (1 – 30%) (inventory) 1 400
= $110 450 2 450
Consideration transferred = $110 000
Gain on bargain purchase = $450

Step 0: Acquisition analysis
Step 1: BCVR entries
Step 1: BCVR entries Q19.11 on 30 June 2015
Adjustment on Consolidation
The assets of the subsidiary are adjusted to the fair values on consolidation
The differences being recorded in the business combination valuation reserve (BCVR)‏
The BCVR is then deemed to be part of the equity acquired


Step 1- BCVR entries 30 June XX (the following years)
When an asset is fully depreciated or sold to an external party the BCVR that was recognised upon its revaluation no longer exists. The amount in BCVR for that asset needs to be transferred over to the Retained Earnings account.
In the books of an entity, the closing balance of the RE account is calculated as:
RE (opening)
+/- Profit (Loss)
- Dividends Paid or Declared
+/- Transfers from/to Other Reserves
= RE (closing)
The consolidation worksheet entries are not affecting the actual books of either entity, they are a manual adjustment for the consolidated financial statements.

What to watch out for.......
Inventory
--At the end of the first financial year take note of:
⇒ How much of the inventory is still on hand?
⇒How much of the inventory has since been sold to
external parties?

When the asset is either fully depreciated or sold to an external party the BCVR no longer exists and must be transferred over to Retained Earnings via the
“Transfer from BCVR”
account.
Depreciable asset
 Each year need to adjust for Depreciation expense and
 ITE account in a previous year must be carried over into
 RE in the current year.

Question19.11
  --P/L at acquisition date: carried over to RE in
subsequent years
--Transfer to General Reserve
--90% of Inventory was sold by 30 June 2015
[remained inventory - 10% of Inventory- will be sold
by 30 June 2016 – need adjustment on 30 June 2017]

Step 1:BCVR entries, Q19.11 at 30 June 2015
Worksheet entries at 30 June 2015
Business combination valuation entries
The entries at 30 June 2015 are affected by: -
the sale of the inventory
(90% & 10% still on hand) - the depreciation of the plant

Cost of sales [sold inventory 2000*90%] Dr 1800
Income tax expense [1800*30%] Cr 540
Transfer from BCVR [1800*70%] Cr *1 260

Inventory [2000*10%] Dr 200
Deferred tax liability [200*30%] Cr 60
Business combination valuation reserve Cr
140


Where did the entry for Transfer from BCVR come from?
90% of the revalued inventory had been sold to external parties by the end of the first financial year
Refer to step 1, 90% of inventory had been sold:
Cost of sales Dr 1 800
Income tax expense Cr 540
Transfer from business combination
valuation reserve Cr 1 260

Step 1:BCVR entries (cont.)
Worksheet entries at

30 June 2015 (cont.)
1. Business combination valuation entries
Accumulated depreciation – Machinery Dr 7 500
Machinery Cr 7 500
Machinery Dr 1 500
Deferred tax liability Cr 450
Business combination valuation reserve Cr
1 050

Depreciation expense Dr
300
Accumulated depreciation Cr
300
($1500*1/5)
Deferred tax liability Dr
90
Income tax expense Cr
90
(30% x $300)

What to watch out for.......
Increases in FV of assets result in the recognition of a new Equity account – BCVR – recognised in the consolidation worksheet. This new equity account must also be eliminated via the pre-acqn elimination entry.
Any Transfer from BCVR needed in the BCVR entries must be reversed out in the pre-acqn entry.
--The Transfer from BCVR account is a temporary account
used to transfer funds from the BCVR account to the RE
account.
A Gain on Bargain Purchase
is a Revenue account which needs to be carried over into Retained Earnings in the following years.
Equity transfers in the books of the Subsidiary
--E.g. Transfer to General Reserve (it’s coming out of RE)

What happens to the pre-acquisition entry next year – 30 June 2016?
Retained earnings (1/7/14) Dr 36 000 Share capital Dr 54 000 Asset revaluation surplus Dr 18 000
General Reserve Dr***3 600
BCVR Dr ** 1 190
Shares in Darren Ltd Cr110 000
* Retained Earnings (1/7/15)
= $36, ,000 (DR at acquisition date)
Less (450) (CR Gain on Bargain Purchase)
Less (3600) (CR Transfer to General Reserve)
Add 1,260 (DR Transfer from BCVR)
= $33,210

***General Reserve
Add 3,600 (CR Transfer to GR)
=$3,600
** BCVR
= $2,450 (DR at acquisition date)
Less (1,260) (CR BCVR, sold 90% of inventory)
= $1,190

What happens to the pre-acquisition entry next year – 30 June 2017?
Retained earnings (1/7/16) Dr *33 210 Share capital Dr 54 000 Asset revaluation surplus Dr 18 000
General Reserve Dr***3 600
BCVR Dr ** 1 190
Shares in Darren Ltd Cr110 000
* Retained Earnings (1/7/16)
= $33 ,210 (DR at 1 July 2016)
Add 140 (DR Transfer from BCVR)
= $33,350
** BCVR
= $1,190 (DR 1/7/16)
Less (140) (CR BCVR, sold 10% of inventory)
= $1,050

Goodwill (Q19.6)
Gain on Bargain Purchase (Q19.11)
Full transcript