合并報表會計課件

ConsolidationMethod

ConsolidationMethod

2Definitions–AASB127Para.4 ConsolidatedFinancialStatements

arethefinancialstatementsofagrouppresentedasthoseofasingleeconomicentityGroup

–aparentandallitssubsidiariesParententity

–

anentitythathasoneormoresubsidiariesSubsidiary

–

anentityincludinganunincorporatedentitysuchasapartnership,thatiscontrolledbyanotherentity2Definitions–AASB127Para.3NatureofconsolidatedfinancialstatementsConsolidatedstatementsarethecombinedfinancialstatementsfora‘group’.AASB3BusinessCombinationsAppendixAbusinesscombination“Thebringingtogetherofseparateentitiesorbusinessesintoonereportingentity”3Natureofconsolidatedfinanc4AppendixAbusinessdefinedas:Anintegratedsetofactivitiesandassetsconductedandmanagedforthepurposeofproviding:Areturntoinvestors;orlowercostsorothereconomicbenefitsdirectlyandproportionatelytopolicyholdersorparticipants.4AppendixAbusinessdefineda5Theacquisitionofanentitycontrastswiththeacquisitionofagroupofassets.AccountingforagroupofassetsisbasedonAASB116Property,PlantandEquipment.5Theacquisitionofanentity6

Consolidatedfinancialstatementsprovideinformationonthefinancialperformanceandpositionofmultipleentitieswhicharetreatedasasinglereportingentity.

Thesestatementsshowonlytheresultsof transactingwithpartiesexternaltotheeconomicentity.6 Consolidatedfinancialstate7NatureofconsolidatedfinancialstatementsTheconsolidatedfinancialstatementsareproducedusingtheinformationcontainedinthefinancialstatementsoftheentitieswithintheeconomicentity,howevertheaccountsoftheindividualentitiesarenotaffectedTheconsolidatedfinancialstatementsconsistof:-Consolidatedstatementofcomprehensiveincome, -Consolidatedstatementofchangesinequity -Consolidatedstatementoffinancialposition.7Natureofconsolidatedfinanc8Natureofconsolidatedfinancialstatements

Whohastoprepareconsolidatedfinancialstatements?AASB3para17:“Anacquirershallbeidentifiedforallbusinesscombinations.Theacquireristhecombiningentitythatobtainscontroloftheothercombiningentitiesorbusinesses.”8Natureofconsolidatedfinanc9AASB3AppendixAReportingentity-Anentityinrespectofwhichitisreasonabletoexpecttheexistenceofuserswhorelyontheentity’sgeneralpurposefinancialreportforinformationthatwillbeusefultothemformakingandevaluatingdecisionsabouttheallocationofresources.Areportingentitycanbeasingleentityoragroupcomprisingaparentandallofitssubsidiaries.9AASB3AppendixA10ConsolidatedfinancialstatementsConsolidatedfinancialstatementsarepreparednotjustfortheshareholdersoftheparententity,butalsoforarangeofusers-creditors,employees,lenders,financialadvisers,analysts.ReasonsforConsolidationTorepresentasfaithfullyaspossiblethefinancialposition,financialperformanceandcashflowsofaparentanditssubsidiariesRelevanttousersUnderstandabletousersComparegrouptootherentitiesbyuser

10Consolidatedfinancialstate11ConceptsofConsolidationEntityconceptofconsolidationassetsandliabilitiesofparentandsubsidiaryNoncontrollinginterest(NCI)equityParententityconceptofconsolidationassetsandliabilitiesofparentandsubsidiaryNCIisaliabilityProprietaryconceptofconsolidationPro-rataconsolidation,basedonparentsshareofsubsidiaryassetsandliabilities11ConceptsofConsolidationEnt12Controlasthecriterionforconsolidation Control-AASB3AppendixA“Thepowertogovernthefinancialandoperatingpoliciesofanentityorbusiness

soastoobtainbenefitsfromitsactivities”.Subsidiaryisanentitythatiscontrolledbyanotherentity.Hencedeterminationofwhetheroneentitycontrolsanotheriscrucialtothedeterminationofwhichentitiesshouldprepareaconsolidatedfinancialreport.

12Controlasthecriterionfor13ControlTwopartstothedefinition:(thepowercriterion)theabilitytodirectthefinancialandoperatingpoliciesofanotherentity.(thebenefitcriterion)theabilitytoobtainbenefitsfromtheotherentity.Passiveversusactivecontrol–maynotbeactivelyinvolvedinthemanagementof.Non-sharedcontrol–canonlybeonecontrollingentity.13ControlTwopartstothedefi14Control

LevelofshareownershipAASB127para13controlispresumedtoexistwhentheparentowns,directlyorindirectlythroughsubsidiaries,morethanhalfofthevotingpowerofanentityi.emorethan50%ofthesharesofanotherentity.Whereownershipinterestislessthan50%thereislessconsensusaboutwhethercontrolexists.14Control Levelofshare15ExistenceofeffectivecontrolFactorsthatmightindicatetheexistenceofcontrol(AASB127,par.13)(cont.) Controlalsoexistswhentheparentownshalforlessofthevotingpowerofanentitywhenthereispowerovermorethanhalfofthevotingrightsbyvirtueofanagreementwithotherinvestors;(b)powertogovernthefinancialandoperatingpoliciesoftheentityunderastatuteoranagreement;(c)powertoappointorremovethemajorityofthemembersoftheboardofdirectorsorequivalentgoverningbodyandcontroloftheentityisbythatboardorbody;or(d)powertocastthemajorityofvotesatmeetingsoftheboardofdirectorsorequivalentgoverningbodyandcontroloftheentityisbythatboardorbody..15Existenceofeffectivecontr16Consolidationadjustments

AASB127para18-31CombinetheaccountsoftheentitiesButsubjectto3typesofadjustments:(i)Thesubstitutioneliminationentry(ii)Eliminationofinter-entitytransactionse.g. sales,andtheireffects(iii)AccountingforanyNoncontrolling interest16Consolidationadjustments17Consolidationadjustments

ConsolidationadjustmentsareNOTmadeintherecordsoftheparentorthesubsidiary,butonaconsolidationworksheetor

in

aspecialconsolidationjournal.Mayneedtorepeatcertainadjustmentseveryyear.17Consolidationadjustments18Consolidationworksheetformat

18Consolidationworksheetform191.Theelimination

entryIneffectwe:(i)substitutetheassetsandliabilitiesofthesubsidiaryfortheasset“SharesinSLtd”thatisshownontheparentcompany’sbalancesheet(ii)eliminatetheparentcompany’sinterestintheacquisitiondateequityofthesubsidiary191.TheeliminationentryIne20

PLtd 80% SLtdAssumeon1July2004,PLtdpaid$250forALLthesharesofSLtd.AtthisdatetherecordedequityofSLtdconsistedof: Sharecapital $150 Retainedearnings 100AllthenetassetsofSLtdarerecordedatfairvalueTheelimination

entry20

PLtd 80% SLtdAssumeo21Theelimination

entryImmediatelybeforeacquisition:

PLtd SLtdSharecapital $200 $150Retainedearnings 100

100 $300 $250Cash $50 $250SharesinSLtd 250 __- $300 $250Q:whataretheassets,andequityoftheeconomicentity?21TheeliminationentryImmedia22Theelimination

entryWecannotsimplyaddthefinancialstatementstogether:

PLtd

SLtd

SumSharecapital $200 $150 $350Retainedearnings 100

100

200 $300 $250 $550Cash $50 $250 $300SharesinSLtd 250 __-

250 $300 $250 $55022TheeliminationentryWecann23Theelimination

entryTheeconomicentity’sfinancialpositionis:Sharecapital $200 (CapitalofPLtd)Ret.earnings 100 (Ret.earningsofPLtd) $300Cash $300 (PLtd+SLtd)Whenaddingthefinancialstatementstogetherweneedtomakeadjustments.23TheeliminationentryTheeco24Theelimination

entryAdjustments:(a) Eliminate“SharesinSLtd” Anentitycannotshowsharesinitselfasan asset.SharesinScannotappearonthegroup balancesheet.(b) EliminatetheequityofSLtdexistingat acquisitiondatei.e.thepre-acquisitionequity

IncludingboththenetassetsofSLtdandthe equityaccountsofSattheacquisitiondate woulddouble-countthenetassetsofS.24TheeliminationentryAdjustm25Theelimination

entryThisentryeliminatestheinvestmentaccountoftheparententity(“SharesinSLtd”)andtheparentcompany’s100%interestintheacquisition-dateequityofthesubsidiary:ShareCapital Dr 150RetainedEarnings Dr 100 SharesinSLtd Cr 25025TheeliminationentryThisen26PLtdSLtdDrCrConsolCapital200150150200Ret.earnings100___100___100100___300250300Cash50250300SharesinSLtd250--250--30025030026PLtdSLtdDrCrConsolCapital227

Theelimination

entryTheeliminationentrycanbepreparedusinganacquisitionanalysis:At1July2004:FVofnetassetsofSLtd=$250cash($150capital+$100ret.earn.)

FVacquiredbyPLtd =100%x$250 =$250Costofacquisition =$250Goodwill/Gainonbargainpurchase=zero27

TheeliminationentryTheel28Theelimination

entryAssumeinthe2004-5periodthatSLtdrecordsanetprofitaftertaxof$75.Theseareallpost-acquisitionprofits–theydonotaffecttheeliminationentry.Theconsolidatedfinancialstatementsshowonlythepost-acquisitionequityofthesubsidiary.ALLpre-acquisitionequityofthesubsidiaryiseliminatedonconsolidation.28TheeliminationentryAssume29PLtdSLtdDrCrConsolRet.earnings220175100295Capital200150150200420325495Cash170325495SharesinSLtd250--250--42032549529PLtdSLtdDrCrConsolRet.ear30Theelimination

entry

Theentryat30/6/05is:RetainedProfits(1/7/04) Dr 100ShareCapital Dr 150 SharesinSLtd Cr 250At30/6/06:RetainedProfits(1/7/05) Dr 100ShareCapital Dr 150 SharesinSLtd Cr 250Needstoberepeatedineachyear’sworksheet30Theeliminationentry Theen31Dividendsfrompre-acquisitionequity Dividendspaidbyasubsidiaryoutofpre-acquisitionprofitsi.e.fromthebalanceofretainedearningsexistingattheacquisitiondatearenottreatedasrevenuebytheparentcompanybutasareductionofthecarryingamountof“SharesinSLtd”.NB.PLtdwillneverpayadividendtoSLtd. Why?31Dividendsfrompre-acquisiti32Dividendsfrompre-acquisitionequity Beforedoingthesubstitutioneliminationentryweneedtodetermineif“SharesinS”hasbeenwrittendownbytheamountofapre-acquisitiondividendpaidbyStoP.Comparethecarryingamountof“SharesinS”withthepurchasepricepaidbyP.If“SharesinS”hasbeenwrittendownwemustreversethiswrite-downandbring“SharesinS”backtotheoriginalcost.32Dividendsfrompre-acquisiti33Dividendsfrompre-acquisitionequity InthebooksofStheneteffectofdeclaringandpayingadividendfrompre-acquisitionprofitsis:DrRetainedearnings xxxCrBank xxxInthebooksofPtheneteffectofreceivingthisdividendis:DrBank

xxxCrSharesinS

xxx

33Dividendsfrompre-acquisiti34Dividendsfrompre-acquisitionequity

Whydoesn’tPcreditarevenueaccountwiththeamountofthedividend?BecausePwilltreatthedividendasapartialreturnofthepurchasepriceitpaidforitsasset“SharesinS”.Toreverse

theeffectofthistransaction: DrSharesinS xxx CrRetainedprofits(opening) xxx(ifdividendwaspaidinapreviousperiod)34Dividendsfrompre-acquisiti35Dividendsfrompre-acquisitionequity

Ifthedividendwasdeclaredandpaidinthe

currentperiod: DrSharesInS xxx CrInterimdividendpaid* xxx*anegativeappropriationaccount35Dividendsfrompre-acquisiti36Dividendsfrompre-acquisitionequityPowns100%ofS.On1June,Sdeclaresafinaldividendof$30whichwillbepaidinAugust.Thisisrecorded:InSLtd’srecords:DrFinaldividendprovided 30CrDividendpayable 30InPLtd’srecords:DrDividendreceivable 30CrSharesinSLtd 3036Dividendsfrompre-acquisiti37Dividendsfrompre-acquisitionequity Toreversetheseentriesatdateofconsolidation: DrSharesinS 30 CrDividendreceivable 30 DrDividendpayable 30 CrFinaldividendprovided 3037Dividendsfrompre-acquisiti38Goodwill“Goodwillonconsolidation”ariseswhenthecostoftheinvestmentinasubsidiaryisgreaterthanthetotalfairvalueofthenetassetsacquired.Itappearsonlyontheconsolidatedbalancesheet.Theeliminationjournalentrywillincludeabalancingdebittogoodwill.38Goodwill“Goodwillonconso39Goodwill Acquisitionanalysisat1/7/04:FVofNAofSLtd =$150+$100 =$250Costofacquisition =$300Goodwill =$300-$250 =$50At1July2004,PLtdpaid$300forALLtheissuedsharesofSLtdwhentheequityofSLtdwas: Sharecapital $150 Retainedearnings 10039Goodwill At1July2004,40Goodwill Theeliminationentryat1/7/04:RetainedEarnings Dr 100ShareCapital Dr 150Goodwill Dr 50 SharesinSLtd Cr 30040Goodwill Theelimination41PLtdSLtdDrCrConsolCapital200150150200Ret.earning100100100100300250300Cash--250250SharesinSLtd300--300--Goodwill505030025030041PLtdSLtdDrCrConsolCapital242Goodwill 30/6/05DrImpairmentLoss 5CrAccumulatedImpairmentLosses 5Remembertheeliminationentrywillalsohavetobedone.

Thedirectorsdeterminethatgoodwillhasbeenimpairedby$5on30/6/0542Goodwill Thedirectorsd43GainonbargainpurchaseThisariseswhenthepurchasepriceoftheinvestmentislessthanthetotalfairvalueofthenetassetsacquired.Beforegainonbargainpurchaseisrecognised,AASB3requiresthattheacquirershallreassesstheproceduretoensurethereisagain.43GainonbargainpurchaseThis44GainonbargainpurchaseOn1/7/04,PLtdpaid$273forthesharesofSLtdwhentherecordsofSLtdshowed:Capital $150 Land $200Retainedearnings 150 Plant 100 $300 $300Allassetsarerecordedatfairvalue44Gainonbargainpurchase45GainonbargainpurchaseAcquisitionanalysisat1/7/04:FVofnetassetsofSLtd =$150+$150 =$300Costofacquisition =$273Gainonbargainpurchase=$2745GainonbargainpurchaseAcqu46GainonbargainpurchaseSubstitutioneliminationentryat1/7/04:RetEarnings Dr 150ShareCapital Dr 150 Excess(P&L) Cr 27 SharesinSLtd Cr 27346GainonbargainpurchaseSubConsolidationMethod

ConsolidationMethod

48Definitions–AASB127Para.4 ConsolidatedFinancialStatements

arethefinancialstatementsofagrouppresentedasthoseofasingleeconomicentityGroup

–aparentandallitssubsidiariesParententity

–

anentitythathasoneormoresubsidiariesSubsidiary

–

anentityincludinganunincorporatedentitysuchasapartnership,thatiscontrolledbyanotherentity2Definitions–AASB127Para.49NatureofconsolidatedfinancialstatementsConsolidatedstatementsarethecombinedfinancialstatementsfora‘group’.AASB3BusinessCombinationsAppendixAbusinesscombination“Thebringingtogetherofseparateentitiesorbusinessesintoonereportingentity”3Natureofconsolidatedfinanc50AppendixAbusinessdefinedas:Anintegratedsetofactivitiesandassetsconductedandmanagedforthepurposeofproviding:Areturntoinvestors;orlowercostsorothereconomicbenefitsdirectlyandproportionatelytopolicyholdersorparticipants.4AppendixAbusinessdefineda51Theacquisitionofanentitycontrastswiththeacquisitionofagroupofassets.AccountingforagroupofassetsisbasedonAASB116Property,PlantandEquipment.5Theacquisitionofanentity52

Consolidatedfinancialstatementsprovideinformationonthefinancialperformanceandpositionofmultipleentitieswhicharetreatedasasinglereportingentity.

Thesestatementsshowonlytheresultsof transactingwithpartiesexternaltotheeconomicentity.6 Consolidatedfinancialstate53NatureofconsolidatedfinancialstatementsTheconsolidatedfinancialstatementsareproducedusingtheinformationcontainedinthefinancialstatementsoftheentitieswithintheeconomicentity,howevertheaccountsoftheindividualentitiesarenotaffectedTheconsolidatedfinancialstatementsconsistof:-Consolidatedstatementofcomprehensiveincome, -Consolidatedstatementofchangesinequity -Consolidatedstatementoffinancialposition.7Natureofconsolidatedfinanc54Natureofconsolidatedfinancialstatements

Whohastoprepareconsolidatedfinancialstatements?AASB3para17:“Anacquirershallbeidentifiedforallbusinesscombinations.Theacquireristhecombiningentitythatobtainscontroloftheothercombiningentitiesorbusinesses.”8Natureofconsolidatedfinanc55AASB3AppendixAReportingentity-Anentityinrespectofwhichitisreasonabletoexpecttheexistenceofuserswhorelyontheentity’sgeneralpurposefinancialreportforinformationthatwillbeusefultothemformakingandevaluatingdecisionsabouttheallocationofresources.Areportingentitycanbeasingleentityoragroupcomprisingaparentandallofitssubsidiaries.9AASB3AppendixA56ConsolidatedfinancialstatementsConsolidatedfinancialstatementsarepreparednotjustfortheshareholdersoftheparententity,butalsoforarangeofusers-creditors,employees,lenders,financialadvisers,analysts.ReasonsforConsolidationTorepresentasfaithfullyaspossiblethefinancialposition,financialperformanceandcashflowsofaparentanditssubsidiariesRelevanttousersUnderstandabletousersComparegrouptootherentitiesbyuser

10Consolidatedfinancialstate57ConceptsofConsolidationEntityconceptofconsolidationassetsandliabilitiesofparentandsubsidiaryNoncontrollinginterest(NCI)equityParententityconceptofconsolidationassetsandliabilitiesofparentandsubsidiaryNCIisaliabilityProprietaryconceptofconsolidationPro-rataconsolidation,basedonparentsshareofsubsidiaryassetsandliabilities11ConceptsofConsolidationEnt58Controlasthecriterionforconsolidation Control-AASB3AppendixA“Thepowertogovernthefinancialandoperatingpoliciesofanentityorbusiness

soastoobtainbenefitsfromitsactivities”.Subsidiaryisanentitythatiscontrolledbyanotherentity.Hencedeterminationofwhetheroneentitycontrolsanotheriscrucialtothedeterminationofwhichentitiesshouldprepareaconsolidatedfinancialreport.

12Controlasthecriterionfor59ControlTwopartstothedefinition:(thepowercriterion)theabilitytodirectthefinancialandoperatingpoliciesofanotherentity.(thebenefitcriterion)theabilitytoobtainbenefitsfromtheotherentity.Passiveversusactivecontrol–maynotbeactivelyinvolvedinthemanagementof.Non-sharedcontrol–canonlybeonecontrollingentity.13ControlTwopartstothedefi60Control

LevelofshareownershipAASB127para13controlispresumedtoexistwhentheparentowns,directlyorindirectlythroughsubsidiaries,morethanhalfofthevotingpowerofanentityi.emorethan50%ofthesharesofanotherentity.Whereownershipinterestislessthan50%thereislessconsensusaboutwhethercontrolexists.14Control Levelofshare61ExistenceofeffectivecontrolFactorsthatmightindicatetheexistenceofcontrol(AASB127,par.13)(cont.) Controlalsoexistswhentheparentownshalforlessofthevotingpowerofanentitywhenthereispowerovermorethanhalfofthevotingrightsbyvirtueofanagreementwithotherinvestors;(b)powertogovernthefinancialandoperatingpoliciesoftheentityunderastatuteoranagreement;(c)powertoappointorremovethemajorityofthemembersoftheboardofdirectorsorequivalentgoverningbodyandcontroloftheentityisbythatboardorbody;or(d)powertocastthemajorityofvotesatmeetingsoftheboardofdirectorsorequivalentgoverningbodyandcontroloftheentityisbythatboardorbody..15Existenceofeffectivecontr62Consolidationadjustments

AASB127para18-31CombinetheaccountsoftheentitiesButsubjectto3typesofadjustments:(i)Thesubstitutioneliminationentry(ii)Eliminationofinter-entitytransactionse.g. sales,andtheireffects(iii)AccountingforanyNoncontrolling interest16Consolidationadjustments63Consolidationadjustments

ConsolidationadjustmentsareNOTmadeintherecordsoftheparentorthesubsidiary,butonaconsolidationworksheetor

in

aspecialconsolidationjournal.Mayneedtorepeatcertainadjustmentseveryyear.17Consolidationadjustments64Consolidationworksheetformat

18Consolidationworksheetform651.Theelimination

entryIneffectwe:(i)substitutetheassetsandliabilitiesofthesubsidiaryfortheasset“SharesinSLtd”thatisshownontheparentcompany’sbalancesheet(ii)eliminatetheparentcompany’sinterestintheacquisitiondateequityofthesubsidiary191.TheeliminationentryIne66

PLtd 80% SLtdAssumeon1July2004,PLtdpaid$250forALLthesharesofSLtd.AtthisdatetherecordedequityofSLtdconsistedof: Sharecapital $150 Retainedearnings 100AllthenetassetsofSLtdarerecordedatfairvalueTheelimination

entry20

PLtd 80% SLtdAssumeo67Theelimination

entryImmediatelybeforeacquisition:

PLtd SLtdSharecapital $200 $150Retainedearnings 100

100 $300 $250Cash $50 $250SharesinSLtd 250 __- $300 $250Q:whataretheassets,andequityoftheeconomicentity?21TheeliminationentryImmedia68Theelimination

entryWecannotsimplyaddthefinancialstatementstogether:

PLtd

SLtd

SumSharecapital $200 $150 $350Retainedearnings 100

100

200 $300 $250 $550Cash $50 $250 $300SharesinSLtd 250 __-

250 $300 $250 $55022TheeliminationentryWecann69Theelimination

entryTheeconomicentity’sfinancialpositionis:Sharecapital $200 (CapitalofPLtd)Ret.earnings 100 (Ret.earningsofPLtd) $300Cash $300 (PLtd+SLtd)Whenaddingthefinancialstatementstogetherweneedtomakeadjustments.23TheeliminationentryTheeco70Theelimination

entryAdjustments:(a) Eliminate“SharesinSLtd” Anentitycannotshowsharesinitselfasan asset.SharesinScannotappearonthegroup balancesheet.(b) EliminatetheequityofSLtdexistingat acquisitiondatei.e.thepre-acquisitionequity

IncludingboththenetassetsofSLtdandthe equityaccountsofSattheacquisitiondate woulddouble-countthenetassetsofS.24TheeliminationentryAdjustm71Theelimination

entryThisentryeliminatestheinvestmentaccountoftheparententity(“SharesinSLtd”)andtheparentcompany’s100%interestintheacquisition-dateequityofthesubsidiary:ShareCapital Dr 150RetainedEarnings Dr 100 SharesinSLtd Cr 25025TheeliminationentryThisen72PLtdSLtdDrCrConsolCapital200150150200Ret.earnings100___100___100100___300250300Cash50250300SharesinSLtd250--250--30025030026PLtdSLtdDrCrConsolCapital273

Theelimination

entryTheeliminationentrycanbepreparedusinganacquisitionanalysis:At1July2004:FVofnetassetsofSLtd=$250cash($150capital+$100ret.earn.)

FVacquiredbyPLtd =100%x$250 =$250Costofacquisition =$250Goodwill/Gainonbargainpurchase=zero27

TheeliminationentryTheel74Theelimination

entryAssumeinthe2004-5periodthatSLtdrecordsanetprofitaftertaxof$75.Theseareallpost-acquisitionprofits–theydonotaffecttheeliminationentry.Theconsolidatedfinancialstatementsshowonlythepost-acquisitionequityofthesubsidiary.ALLpre-acquisitionequityofthesubsidiaryiseliminatedonconsolidation.28TheeliminationentryAssume75PLtdSLtdDrCrConsolRet.earnings220175100295Capital200150150200420325495Cash170325495SharesinSLtd250--250--42032549529PLtdSLtdDrCrConsolRet.ear76Theelimination

entry

Theentryat30/6/05is:RetainedProfits(1/7/04) Dr 100ShareCapital Dr 150 SharesinSLtd Cr 250At30/6/06:RetainedProfits(1/7/05) Dr 100ShareCapital Dr 150 SharesinSLtd Cr 250Needstoberepeatedineachyear’sworksheet30Theeliminationentry Theen77Dividendsfrompre-acquisitionequity Dividendspaidbyasubsidiaryoutofpre-acquisitionprofitsi.e.fromthebalanceofretainedearningsexistingattheacquisitiondatearenottreatedasrevenuebytheparentcompanybutasareductionofthecarryingamountof“SharesinSLtd”.NB.PLtdwillneverpayadividendtoSLtd. Why?31Dividendsfrompre-acquisiti78Dividendsfrompre-acquisitionequity Beforedoingthesubstitutioneliminationentryweneedtodetermineif“SharesinS”hasbeenwrittendownbytheamountofapre-acquisitiondividendpaidbyStoP.Comparethecarryingamountof“SharesinS”withthepurchasepricepaidbyP.If“SharesinS”hasbeenwrittendownwemustreversethiswrite-downandbring“SharesinS”backtotheoriginalcost.32Dividendsfrompre-acquisiti79Dividendsfrompre-acquisitionequity InthebooksofStheneteffectofdeclaringandpayingadividendfrompre-acquisitionprofitsis:DrRetainedearnings xxxCrBank xxxInthebooksofPtheneteffectofreceivingthisdividendis:DrBank

xxxCrSharesinS

xxx

33Dividendsfrompre-acquisiti80Dividendsfrompre-acquisitionequity

Whydoesn’tPcreditarevenueaccountwiththeamountofthedividend?BecausePwilltreatthedividendasapartialreturnofthepurchasepriceitpaidforitsasset“SharesinS”.Toreverse

theeffectofthistransaction: DrSharesinS xxx CrRetainedprofits(opening) xxx(ifdividendwaspaidinapreviousperiod)34Dividendsfrompre-acquisiti81Dividendsfrompre-acquisitionequity

Ifthedividendwasdeclared