Pre- and Post Acquisition reserves Consolidation starts with the acquisition date, i.e. the date when the parent company obtains control of the subsidiary. The profits earned by the subsidiary after the acquisition date are attributable to the shareholders of the holding company in proportion to its shareholding in the subsidiary, and should be reflected in the group's statement of profit or loss. ▸ In preparing the consolidated financial statements subsequent to the acquisition, ▸ the retained profits and reserves shown in the books of the subsidiary can be separated into two parts: ་ those that existed at the acquisition date (known as pre-acquisition profits / reserves) and those that arose after it became a subsidiary (known as post-acquisition profits reserves). ▸ Pre-acquisition profits should be eliminated against the cost of investment in the consolidation process. ་ When the market value of the acquiree is available, NCI should be measured using the fair value method unless otherwise stated. This is the preferred method recommended by HKFRS 3. Example 1.8 P acquired 80% of the equity shares of Q Ltd on 31 December 20x1 by issuing 20,000 ordinary shares as consideration. The market price of P Ltd and Q Ltd were $10 and $2.1 respectively. The statement of financial position of P Ltd and Q Ltd as at 31 December 20x2 are as follows: P Ltd $000 Q Ltd $000 Non-current assets (net) Investment in Q Ltd Net current assets. 750 130 200 450 60 1,400 190 Share capital 500 100 Retained profits. -as at 31 December 20x1 800 70 -for 20x2 100 20 1,400 190 The consolidation journal entries are (assume NCI is measured at fair value): (1) Dr. Share capital of Q Ltd 100,000 Dr. Retained profits of Q Ltd 70,000 Dr. Goodwill at acquisition 72,000 Cr. Investment in Q Ltd Cr. NCI 200,000 42,000 Eliminate investment cost in Q Ltd and NCI, and determine goodwill at acquisition date (2) Dr. Retained profits of Q Ltd Cr. NCI 4,000 4,000 Record the share of retained profits by NCI ($20,000 x 20%) The following is the consolidation worksheet. Consolidation Adjustments P Ltd Q Ltd $000 $000 Dr. Cr. $000 $000 Non-current assets 750 130 Group $000 880 Investment in Q Ltd 200 (1)200 Goodwill at acquisition (1)72 72 Net current assets 450 60 510 1,400 190 1,462 Share capital Retained profits 500 100 (1)100 900 90 (1)70 500 916 68-70/73 (2)4 NCI (1)42 1,400 190 「ཙ (2)4 46 1,462 How to account for the results of a subsidiary

Pre- and Post Acquisition reserves Consolidation starts with the acquisition date, i.e. the date when the parent company obtains control of the subsidiary. The profits earned by the subsidiary after the acquisition date are attributable to the shareholders of the holding company in proportion to its shareholding in the subsidiary, and should be reflected in the group's statement of profit or loss. ▸ In preparing the consolidated financial statements subsequent to the acquisition, ▸ the retained profits and reserves shown in the books of the subsidiary can be separated into two parts: ་ those that existed at the acquisition date (known as pre-acquisition profits / reserves) and those that arose after it became a subsidiary (known as post-acquisition profits reserves). ▸ Pre-acquisition profits should be eliminated against the cost of investment in the consolidation process. ་ When the market value of the acquiree is available, NCI should be measured using the fair value method unless otherwise stated. This is the preferred method recommended by HKFRS 3. Example 1.8 P acquired 80% of the equity shares of Q Ltd on 31 December 20x1 by issuing 20,000 ordinary shares as consideration. The market price of P Ltd and Q Ltd were $10 and $2.1 respectively. The statement of financial position of P Ltd and Q Ltd as at 31 December 20x2 are as follows: P Ltd $000 Q Ltd $000 Non-current assets (net) Investment in Q Ltd Net current assets. 750 130 200 450 60 1,400 190 Share capital 500 100 Retained profits. -as at 31 December 20x1 800 70 -for 20x2 100 20 1,400 190 The consolidation journal entries are (assume NCI is measured at fair value): (1) Dr. Share capital of Q Ltd 100,000 Dr. Retained profits of Q Ltd 70,000 Dr. Goodwill at acquisition 72,000 Cr. Investment in Q Ltd Cr. NCI 200,000 42,000 Eliminate investment cost in Q Ltd and NCI, and determine goodwill at acquisition date (2) Dr. Retained profits of Q Ltd Cr. NCI 4,000 4,000 Record the share of retained profits by NCI ($20,000 x 20%) The following is the consolidation worksheet. Consolidation Adjustments P Ltd Q Ltd $000 $000 Dr. Cr. $000 $000 Non-current assets 750 130 Group $000 880 Investment in Q Ltd 200 (1)200 Goodwill at acquisition (1)72 72 Net current assets 450 60 510 1,400 190 1,462 Share capital Retained profits 500 100 (1)100 900 90 (1)70 500 916 68-70/73 (2)4 NCI (1)42 1,400 190 「ཙ (2)4 46 1,462 How to account for the results of a subsidiary

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter6: Audit Evidence

Section: Chapter Questions

Problem 15CYBK

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