1.
Non-Controlling interest
In consolidation accounting, a non-controlling interest (NCI), also known as
minority interest, refers to the portion of equity ownership in a subsidiary
not attributable to the parent company. When a parent company owns less
than 100% of a subsidiary, the portion of the subsidiary's equity that is not
owned by the parent is considered the non-controlling interest.
Non-controlling interest arises when the parent company holds less than
100% ownership in a subsidiary, but it still has significant influence over the
subsidiary's operations. The NCI represents the portion of the subsidiary's
net assets and results of operations that belong to the minority
shareholders.
Consolidation accounting involves combining the financial statements of
the parent company and its subsidiaries into a single set of financial
statements to reflect the overall financial position and performance of the
group as a whole. When preparing consolidated financial statements, the
NCI is reported separately from the equity attributable to the parent
company's shareholders. This is done to accurately represent the interests
of both the parent company and the minority shareholders in the
consolidated financial statements.
2. Goodwill
Goodwill in consolidation refers to the premium paid by a company (the
acquirer) over the fair value of net identifiable assets acquired when it
purchases another company (the target) in a business combination. It
represents the intangible value of the acquired company's reputation, brand
recognition, customer relationships, intellectual property, and other factors
that contribute to its earning power and market position.
When a company acquires another company, it typically pays a price that
exceeds the fair value of the identifiable assets acquired, such as tangible
assets like property, plant, and equipment, as well as identifiable intangible
assets like patents or trademarks. The excess of the purchase price over
the fair value of these identifiable assets is recorded as goodwill.
Goodwill is recorded as an intangible asset on the acquirer's balance sheet
and represents the amount that the acquirer is willing to pay for the future
benefits expected to arise from the synergies and strategic advantages of
the acquisition. However, it's important to note that goodwill is subject to
impairment testing annually or more frequently if there are indicators of
potential impairment, to ensure that its carrying amount does not exceed its
recoverable amount.
In consolidation accounting, goodwill is recognized as part of the
consolidation process when preparing consolidated financial statements. It
is initially recorded at the time of acquisition and is subsequently tested for
impairment on an ongoing basis. If the carrying amount of goodwill exceeds
its recoverable amount, an impairment loss is recognized in the income
statement.
2.Fair Value
Fair value in consolidation refers to the estimated market value of assets,
liabilities, and equity interests acquired in a business combination. It
represents the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.
In consolidation accounting, fair value is crucial for determining the initial
recognition and subsequent measurement of assets and liabilities acquired
in a business combination. When one company acquires another company,
it needs to allocate the purchase price to the identifiable assets acquired
and liabilities assumed based on their fair values.
Fair value measurement involves the use of various valuation techniques,
including market-based approaches, income approaches, and cost
approaches, depending on the nature of the assets and liabilities being
valued. These techniques may include market comparables, discounted
cash flow analysis, option pricing models, and other methods deemed
appropriate for the specific circumstances.
Fair value is particularly important for intangible assets and contingent
liabilities, which may not have readily determinable market prices. In such
cases, companies may rely on valuation specialists or use complex
modeling techniques to estimate fair values based on available information
and assumptions.
In consolidation accounting, fair value is used to:
1. Allocate the purchase price to the identifiable assets acquired and liabilities
assumed.
2. Determine the initial recognition and subsequent measurement of assets
and liabilities acquired in the business combination.
3. Assess the need for impairment testing of assets acquired and goodwill
recognized.
4. Report the fair value of acquired assets and liabilities in the consolidated
financial statements.
Intra group trading
In consolidation accounting, intra-group trading refers to transactions that
occur between entities within the same consolidated group. When
preparing consolidated financial statements, transactions between
subsidiaries or other entities under common control need to be eliminated
to avoid double counting of revenues, expenses, assets, and liabilities.
Here's how intra-group trading is handled in consolidation accounting:
1. Elimination of Intercompany Transactions: Intra-group trading
transactions, such as sales, purchases, loans, and transfers of assets, are
eliminated during the consolidation process. This is done to avoid
overstating revenues and expenses within the consolidated financial
statements. For example, if one subsidiary sells goods to another
subsidiary within the group, the revenue from the sale and the
corresponding expense are eliminated to prevent double counting.
2. Elimination of Intercompany Profits: When goods are sold between
entities within the group, any unrealized profits resulting from intra-group
transactions are eliminated. For example, if one subsidiary sells inventory
to another subsidiary at a markup, the markup is eliminated from the
consolidated income statement to reflect the transaction as if it had
occurred with an external party at arm's length.
3. Recognition of Intercompany Balances: Intercompany balances, such
as receivables, payables, loans, and investments, are eliminated from the
consolidated balance sheet to avoid double counting of assets and
liabilities. For instance, if one subsidiary owes money to another subsidiary
within the group, the intercompany payable and receivable are offset
against each other in the consolidation process.
4. Disclosure: While intra-group transactions are eliminated from the
consolidated financial statements, they are often disclosed in the notes to
the financial statements to provide transparency to users of the financial
statements. This disclosure may include details about the nature and extent
of intra-group transactions, the policy for determining transfer prices, and
any significant related party relationships.
