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Ref No: 3856
A) Explanation regarding adjustments
Financial statements:The share of the ownership will determine whether or not the entity is a subsidiary or associate undertaking. Companies other than limited companies are consolidated in a similar manner to that of limited companies (Kwinto and Voss, 2016). Angel is an associate, therefore, will not be consolidated rather will be treated as per the guidelines being given in IFRS 9 and FRSSE. The share of the NCI would just be included according to the method of evaluation. The following adjustments have been made to the financial statements of PARISS:
- Intergroup transfers and balances have been deducted from the revenue and cost of the sales while making the consolidated financial statements (Kvaal, 2017). Unrealized profit is deducted from the inventory and amount of sales other than sold outside the group have been deducted from turnover and cost of sales.
- The profits gained from selling the goods within the group have been excluded from the inventory, fixed assets, and investments to eliminate transfer within the group (Brouwer and Hoogendoorn, 2017).
- The amount for which subsidiary has been acquired is compared with the fair value of an asset and liabilities at the date on which acquisition took place. The acquisition of SwP and Angel occurred at the end of the first quarter of the financial year so the assets and liabilities being overtaken would be proportionately included (Prewysz-Kwinto and Voss, 2016). The difference between the value of the investment and fair value of the net assets will be categorised as goodwill on consolidated financial statements. Before reporting the goodwill, impairment has also been taken into account to consider the recoverable amount (Ben‐Shahar, Sulganik and Tsang, 2016). The reserves being reported before the acquisition have been eliminated from the consolidated financial statements.
- The portion of the profit that is generated by the subsidiary after the acquisition have been included in the financial statements (Nnadi, and Tanna, 2016). This will be divided by proportionately dividing it according to the percentage of ownership being acquired by the parent. The portion of income earned before the acquisition would be left out and will not be taken into account.
- No dividend has been paid by the subsidiary otherwise the portion of a dividend paid before the acquisition would have been deducted from the purchase consideration to derive the correct value of the investment (Scholten et al., 2017). This is done to ensure that the dividend received by the parent would not be distributable to the shareholders. Investment income has been outlined for the post-acquisition period, which implies that dividend paid by the subsidiary, have been treated as income by the parent. Consequently, it has been added to the reserves while compiling consolidated financial statements. The dividend has been proportioned as per the pre and post-acquisition period by way of taken into consideration the time after the acquisition period (Tsalavoutas, 2017). However, the recent amendment in the IFRS directs to treat the dividend being paid in the pre-acquisition period out of the reserves that could not have been paid out of the post-acquisition reserves.
- There has not been a rise in the fair value of the fixed asset otherwise would have been incorporated by increasing the value of net assets while calculating goodwill (Fiechter et al., 2017). However, the land is recorded at cost in the financial statement, which has been updated to the fair value. No transfer of the fixed asset took place and there was no need to record the depreciation charge as well
- Parent has also undertaken a lease agreement but since the ownership right have not been transferred to the lease is categorized as an operating lease (Valentinetti, Rea and Basile, 2016). There will be no alteration in the balance sheet as lessee does not have a legal right but rental being paid periodically would be recorded in the income statement, which in this case have already been paid included in the cost of sales figure.
- Payment in transit has also been incorporated. Payment has already been made but has not been received and recorded in the parent financial statements (Bassemir, 2017), therefore, trade receivables have been reduced to that amount while formulating consolidated financial statements.
Minority interest
As PARISS (parent company) does not own a hundred per cent of the subsidiary. There is a need to adjust the minority interest. under the consolidated income statement. Minority interest is that particular portion of the amount that relates to the holdings being attributable to the minority (Tsunogaya, 2016). The minority interest has been disclosed in the income statement under profit after tax by dividing the appropriate percentage.
While formulating the consolidated statement of financial position, hundred percentage of the subsidiary’ assets and liabilities have been added regardless of the percentage of ownership since the Parent company has a controlling stake in the subsidiary (Karamanou, Kopita, and Lemessiou, 2017). Unrealized profit has been deducted from the inventory to reduce the effect of the intergroup transaction…………………….
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