Consolidated financial statements and calculations

Contents

Introduction. 2

Calculations. 2

Acquisition related calculations. 2

Gain on bargain purchase calculation. 3

Journal entries for the business combination. 3

Consolidation Worksheet 7

Financial Statements. 8

Interpretation and analysis. 11

Conclusion. 12

References. 13

Introduction

Consolidated financial statements are those statements which requires the parent company of the group to present the details about the cash flow statements, balance sheet and income statement in an aggregated form and as a single entity. The Australian accounting standard and board (AASB) frames the accounting standards which are important to be considered and these accounting standards also talks about the preparation of consolidated financial statements by the parent company for its subsidiaries so that overall performance of the group can be observed(Mansour, 2017). The AASB 127 deals with the consolidated and separate financial statements. The corporations act 2001 is also considered for this. This AASB 127 is applicable to every such entity which has to make the financial reports and which are treated as reporting entity according to the part 2M.3 of the corporation act 2001(Commonwealth of Australia, 2011).

In this report, a case about the company Ethan Ltd and Darren Ltd is given where all the shares of the Darren Ltd are acquired by the Ethan Ltd as on 1^st July,2017. The details about both the companies are provided separately and a consolidated statement has to be prepared for the group. This report will present the calculations of the consolidated statements and analysis for the same will also be performed and discussed. AASB 3 rule which is according to the IFRS rule 3 is also considered here as the details about the business combination reporting is depicted in AASB 3. Therefore, the accounting standards 3 and 127 rule will be applicable here and will be considered(AASB, 2007).

Calculations

Acquisition related calculations

Fair value of Equity: $54000+$36000+$18000 = $108000

Net fair value of assets:

Machinery: fair value – carrying amount = 94000-92500 = $1500

Inventories = fair value – carrying amount= 16000-14000 = $2000

Tax rate is 30% given. Adjusting this tax rate in net fair value of assets, we get:

Machinery = 1500 (1-30%) = $1050

Inventories = 2000 (1-30%) = $1400

Therefore, Net fair value for the equity and identifiable assets = $10800+$1050+$1400 = $110450

Gain on bargain purchase calculation

Therefore, the net fair value for the equity and assets is $ 110450 for the Darren Ltd and the Ethan Ltd has paid for the acquisitions of the company an amount of $110000. This amount is less than the net identified amount. It means the Ethan Ltd has indulged in the bargain of purchase(Wines et al., 2007).

Gain on bargain purchase = Net fair value of assets and liabilities of Darren Ltd- Consideration paid by Ethan Ltd for the acquisition= $110450-110000= $450

Journal entries for the business combination

Entry 1:

Working Note 1

1. Machinery cost for the Darren Ltd at the time of purchase by the Ethan Limited = $100000

Carrying value in the books of the Darren Ltd for this Machinery = $92500

Therefore, the difference represents the depreciation that needs to be adjusted.

Accumulated depreciation = 100000-92500= $7500

2. Machinery = Cost of machinery – fair value = 100000-94000= $6000
3. Deferred tax liability = fair value – carrying amount = 94000-92500 = $1500(1-30%) = 1050 = 1500-1050 – $450
4. Business combination valuation reserve represents the difference= 7500-6000-450 = $1050

Entry 2:

Working Note 2

1. Depreciation expense= fair value – carrying amount = 94000-92500 = $1500/5= $300 (The life of the machinery is 5 years)

Entry 3:

Working Note 3

1. Deferred tax liability on the depreciation expenses identified = 300 *tax rate = 300*30% = $90

Entry 4:

Working Note 4

1. Inventories = fair value – carrying amount= 16000-14000 = $2000

90% of this is sold. 90% of 2000 is $1800.

2. Tax = 1800*30%= $540
3. The balance is transferred to the business combination valuation reserve.

Entry 5:

 Working Note 5

1. Unsold inventory= 2000*10% = $200
2. Deferred tax liability -200*30% = $60
3. The balance is transferred to the business combination valuation reserve.

Entry 6:

Working Note 6

1. Business combination valuation reserve = $1050+$1260+$140= $2450

Entry 7

Consolidation Worksheet

In this worksheet, the adjustments which are recorded in the journal entries are mentioned and after adjusting the credit and debit balances, the consolidated statement for the group involving Ethan Ltd and Darren Limited is represented.

Financial Statements

In this part, the statement for the profit and loss, changes in equity and changes in financial position will be represented.

Consolidated statement of P&L account as on 30^th June, 2018

Consolidated statement of Other comprehensive income as on 30^th June, 2018

Consolidated statement of changes in Equity as on 30^th June, 2018

 Consolidated statement for changes in financial position as on 30^th June, 2018

Interpretation and analysis

It can be observed from the calculations above that Ethan Ltd has paid 110000 for the acquisition of Darren Ltd whereas the fair value calculated for the acquisition deals according to the AASB 3 rule is 110450. It means the Ethan Ltd has acquired the company on account of gain on bargain purchase of amount $450. The journal entries of a business combination are adjusted and Business combination valuation reserve worth $2450 is credited which later was adjusted in the pre-acquisition entry. All the adjustments related to the Inventory, plant and machinery, accumulated depreciation on plant and machinery, Business combination valuation reserve, Deferred tax liability is depicted in the consolidation worksheet for the Ethan Ltd group. The pre-tax profit of the group is $130850 and after-tax profit for the group is $71280. Retained earnings after the adjustments of transfer to general reserve worth $3000 for the group are $151280.Gain on asset revaluation for the group is $7000 and it increased the Asset revaluation surplus for the group which amounts to $20500. After making some adjustments in the liabilities, the liabilities for the broke the became $55920 and the value of the plant and machinery after adjusting accumulated depreciation of -135800 became $343800(Australian Government, 2015).

The consolidated statement for the profit and loss account and comprehensive income shows that the profit is $71280 and the total comprehensive income after adjusting the revaluation gain on the Asset is $78280. The consolidated statement for the changes in equity shows that retained earnings for the period are $151280, share Capital for the period is $360000, Asset revaluation surplus is $20500 and the general reserve is $10000. The consolidated statement for changes in the financial position close that total assets are $597700, Total equity is $541780 and total liabilities are $55920(PWC, 2011).

Conclusion

To conclude the discussion, whenever a company acquired a majority of the state for another company, the acquirer company becomes the parent company the other company becomes subsidiary. It is important according to the AASB rule 127, to prepare consolidated statements by the parent company which will depict the performance of both Parent company and a subsidiary company in the consolidated form so that performance for the overall group can be evaluated. Whenever a company acquire a stake in another company, it is important to pass adjustments entries and prepare a business combination report as per AASB rule 3. Overall, many changes are observed in the consolidated performance of Ethan Ltd after acquiring Darren Ltd.

 References

AASB, 2007. Business Combinations – Compiled Accounting Standard. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB3_07-04_COMPapr07_07-07.pdf.

Australian Government, 2015. Business Combinations – AASB Standard, Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf

Commonwealth of Australia, 2011. AASB 127 – Consolidated and Separate Financial Statements – March 2008. [Online] Available at: https://www.legislation.gov.au/Details/F2011C00949.

Mansour, E., 2017. Changes in IFRS 3 Accounting for Business Combinations: A Feedback and Effects Analysis. Global Journal of Business Research, 1(1), pp.61-70, Available at:https://www.researchgate.net/publication/317848050_Changes_in_IFRS_3_Accounting_for_Business_Combinations_A_Feedback_and_Effects_Analysis

PWC, 2011. Practical guide to IFRS- Consolidated financial statements: redefining control, Available at:https://www.pwc.com.au/industry/real-estate/assets/practical-guide-ifrs-consolidated-jul11.pdf

Wines, G., Dagwell, R. & Windsor, C., 2007. Implications of the IFRS Goodwill Accounting Treatment. Managerial Auditing Journal, 22(9), Available at:https://www.researchgate.net/publication/29465013_Implications_of_the_IFRS_Goodwill_Accounting_Treatment