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Introduction
1. The context and purpose of financial reporting
2. Accounting principles, concepts and qualitative characteristics
3. Double-entry bookkeeping and accounting systems
4. Recording transactions and events
5. Reconciliations
6. Preparing trial balance
7. Preparing financial statements
8. Preparing basic consolidated financial statements
8.1 Introduction to group accounts
8.2 Acquisition method
8.2.1 Steps one and two
8.2.2 Step three
8.2.3 Step four
8.3 Intra-group trading adjustments
8.4 The consolidation procedures
8.5 Investment in associates
8.6 Consolidated statement of financial position
8.7 Consolidated statement of profit or loss
9. Interpretation of financial statements
Wrapping up
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8.2.1 Steps one and two
Achievable ACCA Financial Accounting
8. Preparing basic consolidated financial statements
8.2. Acquisition method
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Steps one and two

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This chapter explains how to account for acquisitions that create a group (a parent-subsidiary relationship) using the acquisition method. It focuses on the first two steps of the acquisition method.

Learning objectives

By the end of this subchapter, you should be able to:

  • Identify subsidiaries within a group structure.
  • Identify an associate within a group structure

Before we look at consolidated financial statements in full, you need a clear understanding of how consolidation (i.e., a business combination) is accounted for. Each step is explained and illustrated with examples.

Take time to understand each step before moving on to the next lesson.

Acquisition method

All business combinations (i.e., acquisitions that result in a parent-subsidiary relationship) are accounted for using the acquisition method.

Definitions
Acquisitions method
The steps to be followed in the use of the method are outlined below:
  • Step 1: Identifying the acquirer
  • Step 2: Determining the acquisition date
  • Step 3: Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest (NCI) in the acquiree.
  • Step 4: Recognizing and measuring goodwill or a gain from a bargain purchase.
Definitions
Step 1: Identification of the acquirer
This step involves identifying the entity that obtains ‘control’ of the acquiree (i.e., identifying the parent and the subsidiary).

Although control can exist even when an investor holds less than 50% of the voting rights in the investee, questions in this syllabus usually identify the acquirer based on voting rights.

Some companies obtain control through gradual acquisition, but that situation is outside the scope of this syllabus.

So, the first thing to establish is the acquirer’s voting rights. This is sometimes referred to as the group structure.

Illustration: Identifying an acquirer

JB Limited acquired 150 million shares of GG Co. Limited’s 200 million equity share capital, valued at $ 100 million, on 1 January 20X5 for $800,000, when GG Co. Limited’s retained earnings were $750,000. JB Limited further acquired 100 million shares of DBL Inc.'s 500 million equity shares on 1 January 20X6 for $ 800,000. Required: Calculate and explain the voting rights held by JB Limited in both companies. Suggested solution

Do you know the answer?

(spoiler)

To determine a group structure, compare the number of shares acquired with the total number of shares in the acquiree.

JB Limited and GG Co. Limited

  • JB Limited will own 75% share (i.e., 150m/200m x 100) in GG Co. Limited.
  • Based on this, since JB Limited holds more than 50% share in GG Co. Limited effective 1 January 20X5, the former will be said to have control over the latter.
  • JB Limited then becomes the parent company and GG Co. Limited will be the subsidiary company.
  • The remaining 25% shares (200m-150m/200m) in GG Co. Limited, not controlled by JB Limited becomes its non-controlling interest (NCI).
  • Any profit or loss made by the subsidiary (i.e., GG Co. Limited) will be shared in the ratio of 75:25 between JB Limited (i.e., parent company) and the NCI (i.e., the other investors), respectively.
  • Assuming JB Limited acquired all the 200m shares in GG Co. Limited, then there wouldn’t have been any NCI. GG Co. Limited would have become a 100% subsidiary of JB Limited. Meaning the parent will own all the profit and assets of the subsidiary. JB Limited and DBL Inc.
  • JB Limited will own 20% share (i.e., 100m/500m x 100 ) in DBL Inc.
  • Based on this, since JB Limited holds less than 50% share in DBL Inc., the former will be said to have no control over the latter.
  • DBL will only be an associate company to JB Limited.

Now let’s move on to the second step in the acquisition method.

Definitions
Step 2: Determination of the acquisition date
The acquisition date is the date on which control is obtained by the acquirer. In other words, it’s the date on which the acquirer obtained more than 50% voting rights in the acquiree.

This date matters because consolidation includes the acquiree’s events and transactions from the acquisition date onward.

Illustration: Determining the acquisition date

JB Limited acquired 150 million shares of GG Co. Limited’s 200 million equity share capital worth $100million on 1 January 20X5 for $800,000 when GG Co. Limited’s retained earnings were $750,000. JB Limited further acquired 100m shares of DBL Inc. 500million equity shares on 1 January 20X6 for $ 800,000. Required: Determine the acquisition date. Suggested solution:

Do you know the answer:

(spoiler)

JB Limited and GG Co. Limited

  • The acquisition date is 1 January 20X5, which is the date for which control was obtained by JB Limited. JB Limited and DBL Inc.
  • No control was obtained; hence, no acquisition date. Nevertheless, we will say that JB Limited became an associate from 1 January 20X6.

Note: The other two (2) steps are covered in the next chapter.

  • The acquisition method has four steps: identify acquirer, date, measure assets, recognize goodwill.
  • Acquirer is an entity obtaining control, usually through over 50% voting rights.
  • Non-controlling interest represents remaining shares not owned by the parent company.
  • Acquisition date is when control is obtained; consolidation starts from this date.

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Steps one and two

This chapter explains how to account for acquisitions that create a group (a parent-subsidiary relationship) using the acquisition method. It focuses on the first two steps of the acquisition method.

Learning objectives

By the end of this subchapter, you should be able to:

  • Identify subsidiaries within a group structure.
  • Identify an associate within a group structure

Before we look at consolidated financial statements in full, you need a clear understanding of how consolidation (i.e., a business combination) is accounted for. Each step is explained and illustrated with examples.

Take time to understand each step before moving on to the next lesson.

Acquisition method

All business combinations (i.e., acquisitions that result in a parent-subsidiary relationship) are accounted for using the acquisition method.

Definitions
Acquisitions method
The steps to be followed in the use of the method are outlined below:
  • Step 1: Identifying the acquirer
  • Step 2: Determining the acquisition date
  • Step 3: Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any non-controlling interest (NCI) in the acquiree.
  • Step 4: Recognizing and measuring goodwill or a gain from a bargain purchase.
Definitions
Step 1: Identification of the acquirer
This step involves identifying the entity that obtains ‘control’ of the acquiree (i.e., identifying the parent and the subsidiary).

Although control can exist even when an investor holds less than 50% of the voting rights in the investee, questions in this syllabus usually identify the acquirer based on voting rights.

Some companies obtain control through gradual acquisition, but that situation is outside the scope of this syllabus.

So, the first thing to establish is the acquirer’s voting rights. This is sometimes referred to as the group structure.

Illustration: Identifying an acquirer

JB Limited acquired 150 million shares of GG Co. Limited’s 200 million equity share capital, valued at $ 100 million, on 1 January 20X5 for $800,000, when GG Co. Limited’s retained earnings were $750,000. JB Limited further acquired 100 million shares of DBL Inc.'s 500 million equity shares on 1 January 20X6 for $ 800,000. Required: Calculate and explain the voting rights held by JB Limited in both companies. Suggested solution

Do you know the answer?

(spoiler)

To determine a group structure, compare the number of shares acquired with the total number of shares in the acquiree.

JB Limited and GG Co. Limited

  • JB Limited will own 75% share (i.e., 150m/200m x 100) in GG Co. Limited.
  • Based on this, since JB Limited holds more than 50% share in GG Co. Limited effective 1 January 20X5, the former will be said to have control over the latter.
  • JB Limited then becomes the parent company and GG Co. Limited will be the subsidiary company.
  • The remaining 25% shares (200m-150m/200m) in GG Co. Limited, not controlled by JB Limited becomes its non-controlling interest (NCI).
  • Any profit or loss made by the subsidiary (i.e., GG Co. Limited) will be shared in the ratio of 75:25 between JB Limited (i.e., parent company) and the NCI (i.e., the other investors), respectively.
  • Assuming JB Limited acquired all the 200m shares in GG Co. Limited, then there wouldn’t have been any NCI. GG Co. Limited would have become a 100% subsidiary of JB Limited. Meaning the parent will own all the profit and assets of the subsidiary. JB Limited and DBL Inc.
  • JB Limited will own 20% share (i.e., 100m/500m x 100 ) in DBL Inc.
  • Based on this, since JB Limited holds less than 50% share in DBL Inc., the former will be said to have no control over the latter.
  • DBL will only be an associate company to JB Limited.

Now let’s move on to the second step in the acquisition method.

Definitions
Step 2: Determination of the acquisition date
The acquisition date is the date on which control is obtained by the acquirer. In other words, it’s the date on which the acquirer obtained more than 50% voting rights in the acquiree.

This date matters because consolidation includes the acquiree’s events and transactions from the acquisition date onward.

Illustration: Determining the acquisition date

JB Limited acquired 150 million shares of GG Co. Limited’s 200 million equity share capital worth $100million on 1 January 20X5 for $800,000 when GG Co. Limited’s retained earnings were $750,000. JB Limited further acquired 100m shares of DBL Inc. 500million equity shares on 1 January 20X6 for $ 800,000. Required: Determine the acquisition date. Suggested solution:

Do you know the answer:

(spoiler)

JB Limited and GG Co. Limited

  • The acquisition date is 1 January 20X5, which is the date for which control was obtained by JB Limited. JB Limited and DBL Inc.
  • No control was obtained; hence, no acquisition date. Nevertheless, we will say that JB Limited became an associate from 1 January 20X6.

Note: The other two (2) steps are covered in the next chapter.

Key points
  • The acquisition method has four steps: identify acquirer, date, measure assets, recognize goodwill.
  • Acquirer is an entity obtaining control, usually through over 50% voting rights.
  • Non-controlling interest represents remaining shares not owned by the parent company.
  • Acquisition date is when control is obtained; consolidation starts from this date.

More from Acquisition method

  • Step three
  • Step four