Advanced Financial Accounting and Reporting: Consolidation, Foreign Currency, and Special Topics
Business combinations and consolidation
Under PFRS 3, apply the acquisition method: identify the acquirer, determine the acquisition date, recognize and measure identifiable assets, liabilities, and non-controlling interest, and recognize goodwill or a bargain gain. Know both measurement choices for NCI: fair value (full goodwill) and proportionate share (partial goodwill). Goodwill equals consideration transferred plus NCI plus previously held interest minus net identifiable assets acquired.
For consolidation, eliminate intercompany balances, unrealized profits in inventory and in depreciable assets, and adjust for upstream versus downstream sales. Downstream profits are attributed entirely to the parent; upstream profits are shared with NCI.
Foreign currency
Distinguish functional currency from presentation currency. Monetary items are retranslated at the closing rate with differences in profit or loss; non-monetary items at historical cost stay at the historical rate. Translation of foreign operations uses the closing rate for assets and liabilities, average rate for income and expenses, and the resulting difference goes to OCI as a translation reserve.
Traps
- Applying the parent's share to downstream unrealized profit.
- Using the closing rate for equity accounts of a foreign operation instead of the historical rate.
- Forgetting to remeasure a previously held equity interest to fair value at the acquisition date.
- Recording bargain purchase as negative goodwill instead of a gain in profit or loss after reassessment.
Worked example
Consideration 1,000; NCI at proportionate share 150; fair value of net identifiable assets 1,100. Goodwill = 1,000 + 150 - 1,100 = 50. If the total had been below 1,100, the excess is a gain.