 A group is a business combination is a parent and the acquiree is a subsidiary, and the business

combination results from the parent acquiring a controlling interest in the equity (not net
assets) of the subsidiary
 Both parent and subsidiary retain their status as separate legal entities. However, from an
economic perspective, they are a single reporting entity.

Intercorporate investment

- any purchase by one corporation of the securities of another corporation

Passive investment

- made to earn dividends or to earn profits by actively trading the investment for short term profit

- initially recorded as cost and are reported at fair market value on each period’s statement of financial
position or balance sheet

Strategic investment

- made to significantly influence or control the operations of the investee corporation

- provide a strategic or long-term advantage by giving the investor the ability to either significantly
influence or control the operating or financial decisions of an investee

- if a company owns, either directly or indirectly, 20% or more of the voting shares of the investee

Subsidiary

- a corporation (or an unincorporated entity such as a partnership or rust company) that is controlled by
a parent company that owns, usually, a majority of the voting shares/rights of the subsidiary

Consolidation

- process of combining the assets, liabilities, earnings and cash flows of a parent and its subsidiaries as if
they were one economic entity

Parent

- is an entity that controls one or more subsidiaries

Group

- is a parent and all subsidiaries

 An investor determines whether it is a parent by assessing or controls one or more investees

Power

- the ability to direct those activities which significantly affect the investee’s returns

 Elements of control – investor: power over the investee, exposure, or rights to variable returns,
the ability to use power over the investee
Subsidiary

- as an entity that is controlled by another entity, the parent.

Separate financial statements

- those presented by a parent, an investor in an associate or a joint venturer in a joint venture in which
the investments are accounted for based on the direct equity interest rather than based on the reported
results and net assets of the investees

 The purpose of consolidated statements is to present, primarily for the benefit of the owners
and creditors of the parent, the results of operations and the financial group were a single
economic entity

Allocated excess

- difference between the fair value of the subsidiary and the book value of the acquiree’s net identifiable
assets

 Full goodwill approach / fair value basis

 Partial-goodwill approach / proportional basis

Full goodwill approach

- when noncontrolling interest are measured at fair value, goodwill attributable to non-controlling
interests will be recognized in the consolidated financial statements

NCI

- Share of book value of identifiable net assets of subsidiary.

- Share (fair value-book value) of identifiable net assets of subsidiary at acquisition date

- share of goodwill in subsidiary at acquisition date

Partial goodwill approach

- where non-controlling interest are measured as a proportion of the acquiree’s identifiable net assets.

NCI

- Share of book value of identifiable net assets of subsidiary.

- Share (fair value-book value) of identifiable net assets of subsidiary at acquisition date

Goodwill

- an unidentifiable asset in which its existence is an important motivation for a parent to acquire a
subsidiary

- a premium that a parent pays to acquire the subsidiary and should be separately recognized as an
asset in the consolidated financial statements
Entity theory

- non-controlling interests are deemed to be as important as a stakeholder of the combined entity like
the majority shareholders

- the distinction between the parent and the non-controlling interests are both included in equity

- the consolidated financial statements should be prepared and presented for the benefit of both groups
of equity holders

- non-controlling interests are shown as equity in the balance sheet

- the fair values of assets and liabilities of subsidiaries at the date of acquisition should be reported in
full to reflect the stakes of both parent company and non-controlling shareholders in the net assets of
the subsidiaries

- goodwill is an asset of the economic unit and should be reflected in full

- net profit of the subsidiary should be reported in full as accruing to both majority ad non-controlling
shareholders

Parent theory

- NCI; neither as equity nor debt

- focuses on the information needs of the aren’t company shareholders

- the conso FS are prepared and presented primarily for the benefits of the parent company
shareholders

- claims by NCI in the net assets of a subsidiary are shown as a separate component in the balance sheet

- only the parent’s share of the fair value of the assets and liabilities of subsidiaries at the date of
acquisition should be reported

Control premium

- an amount that a buyer is usually wiling to pay over the current market price of a publicly traded
company

Reverse acquisition

- occurs when an enterprise obtains ownership of the shares of another enterprise but, as part of the
transaction, issues enough voting shares as consideration that control of the combined enterprise
passes to the shareholders of the acquired enterprise

Fair value

- defined under PFRS 13 as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between markets at the measurement date

Push-down accounting
- practice of revaluing an acquired subsidiary’s assets and liabilities to their fair values directly on that
subsidiary’s books at the date of acquisition

Investment entity

- obtains funds from one or more investors for the purpose of providing those investors with investment
management services

- Commits to its investors that its business purpose is to invest funds solely for returns from capital
appreciation income, or both

- measures and evaluates the performance of substantially all its investments on a fair value basis

PAS 27 paragraph 4 separate financial statements

- those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in

which the investments are accounted for based on the direct equity interest rather than based on the
reported results and net assets of the investees

 An entity shall recognize a dividend from a subsidiary, JO, or associate in P/L in its separate FS
when its right to receive the dividends is established
 All dividends paid or payable by a subsidiary to a parent are to be recognized as revenue by the
parent
 Equity method of accounting is often called a one-line consolidation

One line consolidation

- a parent company income and stockholder’s equity are the same when a subsidiary company is
accounting for under a complete and correct application of the equity method

Upstream sale of inventory

- resold by the parent to a non-affiliate during the same period, the entire parent’s cost model entries
and the eliminating entries in the consolidation are identical

- subsidiary to parent

Downstream sales

- parent to subsidiary
 Downstream sales Upstream sales

To eliminate intercompany sales

Sales Sales
Purchases (COGS) Purchases (COGS)

To recognize profit in Beg. Inv

Investment in Subsidiary (equity method)
or Beg. RE (cost model)
Beg. Inv - income statement (COGS)
To eliminate unrealized profit in end inv
End inventory (COGS)
Inventory (balance sheet)
Investment in Subsidiary (equity method)
or Beg. RE (cost model)
NCI
Beg. Inv - income statement (COGS)
end inventory (COGS)
inventory (balance sheet)