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Ebook Financial accounting reporting and analysis - International edition (2nd edition): Part 2

(BQ) Part 2 book "Financial accounting reporting and analysis - International edition" has contents: Accounting for groups at the date of acquisition, preparation of consolidated balance sheets after the date of acquisition, preparation of consolidated income statements, accounting for associated companies,.and other contents. | FAR_C15.QXD 25/10/05 17:02 CHAPTER Page 363 15 Accounting for groups at the date of acquisition 15.1 Introduction This chapter will consider: ● ● ● ● ● ● ● ● ● The definition of a group Consolidated accounts and some reasons for their preparation The definition of control The purchase method The treatment of goodwill The comparison between an acquisition by cash and an exchange of shares Minority interests The treatment of differences between fair value and book value The determination of fair values. 15.2 The definition of a group Under IAS 27 Consolidated and Separate Financial Statements, a group exists where one enterprise (the parent) controls, either directly or indirectly, another enterprise (the subsidiary). A group consists of a parent and its subsidiaries.1 This book deals only with situations where both the parent and subsidiary enterprises are companies. 15.3 Consolidated accounts and some reasons for their preparation In most cases a parent company is required by IAS 27 to prepare consolidated financial statements. These show the accounts of a group as though that group was one enterprise. The net assets of the companies in a group will therefore be combined and any intercompany profits and balances eliminated. Why are groups required to prepare consolidated accounts? (i) To prevent the preparation of misleading accounts by such means as inflating the sales through selling to another member of a group. FAR_C15.QXD 25/10/05 17:02 Page 364 364 • Consolidated accounts (ii) To provide a more meaningful EPS figure. Consolidated accounts show the full earnings on a parent company’s investment while a parent’s individual accounts only show the dividend received from the subsidiaries. (iii) To provide a better measurement of the performance of a parent company’s directors. In consolidated accounts the total earnings of a group can be compared with its total assets in arriving at a group’s return on capital employed (ROCE). ROCE is regarded as .