Life is a gift, wake up every day and realise

that.

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 Inter-Corporate Entities
•Objectives
•Examine the criteria for the recognition of an
entity as a subsidiary.
•Examine the criteria for the recognition of an
entity as an associate.
•Understand accounting for subsidiaries,
associates and other long term investments
and their impact on the financial statements.
•Understand the accounting treatment for
stock based compensation.

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 Corporate Acquisitions
A parent entity is an entity that controls (the
entity acquires more that 50% of the voting
shares of another entity) or exercises control
over one or more entities.

A subsidiary is an entity that is controlled by

another entity (the Parent).

The % of shares in the subsidiary that are not

owned by the parent represent the non-
controlling interest.
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Positive goodwill arises when the purchase
price paid for the acquisition of a subsidiary is
greater than the net asset value of the interest
acquired.

Positive goodwill is reflected as a non-current

asset in the Consolidated Statement of
Financial Position and is tested for impairment
annually are more frequently if necessary.
 Accounting for a Subsidiary
•All the assets and liabilities of the subsidiary or
subsidiaries are aggregated with that of the
parent entity, with set-off for inter-entity
transactions .

•The Consolidated Statement of Comprehensive

Income statement will reflect the combined
revenue and expenses of the parent entity and
the subsidiary or subsidiaries, with set-off for
inter-entity transactions.
 Accounting for an Associate Entity

Where an entity acquires between 20% to 50% of

the voting shares of another entity as a long term
investment, and exerts significant influence but
not control, the entity that acquired the shares
will refer to this long term investment as an
associate.

The entity that acquired the shares will account for

its associate using the equity method of
accounting.
 The long term investment in the associate will
initially be recorded at cost and the carrying
amount is increased or decreased to recognize the
investing entity’s share of post acquisition
profit/losses and reserves minus any impairment.
The investment is tested for impairment annually.

The value for the investment in the associate is

reflected under non-current assets.
 Concerns for the Analyst
•The type of business combination
•The ownership structure
•Organisational fit of the entities
•The purchase price paid
•Goodwill if any and how is it being treated
•Unless a subsidiary is also a public company
the analyst will not be able to get
disaggregated data on the subsidiary or
subsidiaries. Economic results for the parent
and its subsidiary or subsidiaries will be
obscured, so seek additional data from the
segment report.
 Accounting for Other Investments
Equity Investment
Where an entity acquires less than 20% of the
voting shares of another entity as a long term
investment, this investment is reflected under
non-current assets. The investment is tested
for impairment annually.

Debt Investment
Investment in Treasury Bills, Debentures and
Bonds.
Sources of Income from Investments

•Interest income ( usually stable )

•Dividend income

•Gains and losses

• Realized (e.g. investment sold )
•Unrealized (investment still owned by the
company)
 Concerns for the Analyst
•Market value adjustments for unrealized gains /
losses increases volatility of profits for trading
securities
•Gains and losses on trading securities may not
be very predictable and may be uncertain
Multinational Entities - Concerns for the Analyst

•The method used to convert assets and

liabilities of foreign enterprises (as the method
used affects the company’s results differently).
•Transfer pricing schemes to shift profits.
•Inter-company contracts and arrangements
 Accounting for Stock Based Compensation
IFRS currently requires that stock based
compensation should be accounted for in the
period when the service is provided and not
when the service is paid for.
 Off Balance Sheet Activities
• IFRS has endeavored to eliminate the practice of ‘off
balance sheet’ items however the analyst should bear
in mind
• Intangible assets - Internally generated brands,
mastheads, publishing titles, customer lists and
similar items should not be recognised as intangible
assets. Only if they have been purchased or in
development if the item can be segregated and sold.
While goodwill which arises upon consolidation will
not be written off unless it has been ‘impaired’

• Contingent liabilities will also not be included. Note

that if a liability exists but its amount cannot be
reliably estimated it is classified as a contingent
liability.
Statement of Comprehensive Income
The statement of comprehensive income has 2 basic elements:

• Profit or Loss for the period: here, all items of income and expenses
must be recognized.

• Other comprehensive income: items recognized directly to equity or

reserves, such as changes in revaluation surplus, gains or losses from
subsequent measurement of available-for-sale financial assets, etc.
Life is a gift, wake up every day and realise
that.

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