Consolidation Accounting
The Legendary Iqbal Khan
ACTG4160: Advanced Financial Accounting!
!
Inter-Corporate Investments, Business Combinations and Consolidations!
!
Introduction!
!
- Non-strategic investments can be FVTPL or FVTOCI while strategic investments range from significant influence to joint arrangements to controlled subsidiaries!
- Investments under 20% are considered passive unless clearly demonstrated otherwise!
- No strategic advantage in terms of ability to influence or control the investee!
- FVTPL recorded at cost initially, revalued on each SFP date and reported at FV!
- All gains and losses (realized and unrealized) and dividends are through P&L!
- All transaction costs are expensed immediately (impairment losses inherent)!
- All derivates other than those used in hedging are classified as FVTPL!
- Akin to held-for-trading classification under IAS 39!
- FVTOCI is an irrevocable option at time of initial recognition!
- Initial recording and subsequent reporting similar to FVTPL!
- Gains and losses (realized and unrealized) are through OCI (never P&L) while dividends are recorded as income!
- Transaction costs added to the cost of the asset (impairment losses inherent)!
- Similar to available-for-sale classification under IAS 39 except with AFS all gains or losses accumulated in OCI are transferred to net income upon sale!
- Strategic investments are part of operating strategy and are of a long-term nature, therefore need is to look at the economic entity instead of the legal entity!
- Controlled subsidiaries and special purpose entities need to be consolidated!
- Prior to 2013, control existed when one entity had the power to direct the financing and operating activities of another entity to derive benefits from it!
- Since 2013, it became the power of a reporting entity to direct the activities of another entity to generate returns for the reporting entity!
- Elements of control are: power over investee, exposure / rights to variable
returns
ACTG4160: Advanced Financial Accounting!
!
Inter-Corporate Investments, Business Combinations and Consolidations!
!
Introduction!
!
- Non-strategic investments can be FVTPL or FVTOCI while strategic investments range from significant influence to joint arrangements to controlled subsidiaries!
- Investments under 20% are considered passive unless clearly demonstrated otherwise!
- No strategic advantage in terms of ability to influence or control the investee!
- FVTPL recorded at cost initially, revalued on each SFP date and reported at FV!
- All gains and losses (realized and unrealized) and dividends are through P&L!
- All transaction costs are expensed immediately (impairment losses inherent)!
- All derivates other than those used in hedging are classified as FVTPL!
- Akin to held-for-trading classification under IAS 39!
- FVTOCI is an irrevocable option at time of initial recognition!
- Initial recording and subsequent reporting similar to FVTPL!
- Gains and losses (realized and unrealized) are through OCI (never P&L) while dividends are recorded as income!
- Transaction costs added to the cost of the asset (impairment losses inherent)!
- Similar to available-for-sale classification under IAS 39 except with AFS all gains or losses accumulated in OCI are transferred to net income upon sale!
- Strategic investments are part of operating strategy and are of a long-term nature, therefore need is to look at the economic entity instead of the legal entity!
- Controlled subsidiaries and special purpose entities need to be consolidated!
- Prior to 2013, control existed when one entity had the power to direct the financing and operating activities of another entity to derive benefits from it!
- Since 2013, it became the power of a reporting entity to direct the activities of another entity to generate returns for the reporting entity!
- Elements of control are: power over investee, exposure / rights to variable
returns