SEMA F2 Financial Management: Chapter 1 - Group Accounting

Introduction

• Focus on group accounting, building on concepts from SEMA F1 consolidation.
• Preparation of consolidated financial statements provides relevant information to stakeholders.
  • Individual information is important for local jurisdictions.
  • Investors need an overview of the group's investments as a whole.
• Standards on consolidation make information more relevant to investors.

Key Terminology

Subsidiary

• An entity where the parent company has > 50% voting power (control).
• Control: Power to govern financial and operating policies.
• Control can sometimes occur with < 50% voting power through indirect means (e.g., board influence, profit agreements).

Parent Company

• The top entity in the group structure controlling subsidiaries and having interests in associates.

Associate

• A company in which the parent has significant influence but not control (20-50% ownership/voting power).
• Significant influence: Ability to influence policies and decisions.

Net Assets

• Net Assets = Capital + Reserves or Assets - Liabilities.
• Net assets are crucial for calculating goodwill.

Group Reserves

• Consolidated reserves of the investor.
• Includes 100% of the parent and post-acquisition retained gains of subsidiaries, joint ventures, and associates.

Non-Controlling Interest (formerly Minority Interest)

• Shareholders without control or significant influence.
• E.g., owning 20% in a company where the parent owns 80%.

Goodwill

• Premium paid over net assets of acquired subsidiary or associate.

Importance of Consolidation

• Represents 35% of the syllabus—important to understand consolidations.
• Key workings for consolidation: group retained earnings, goodwill calculation, non-controlling interest, consolidated reserves.

Consolidated Retained Earnings

• Workings involve parent company, subsidiaries, and associate companies.
• Figures taken from statement of financial position at consolidation date.
• Adjustments:
  • Correct omissions/errors in individual financial statements.
  • Provision for Unrealized Profit: Adjust sales within the group not yet realized externally.
  • Write-offs of Fair Value Adjustments: Adjust for excess value depreciation through consolidated P&L.
  • Impairment of Goodwill: Recycled through consolidated P&L.
• After adjustments, subtract pre-acquisition reserves for true post-acquisition profit.
• Consolidate 100% of parent and relevant percentages of controlled/influential entities.

Conclusion

• Practice consolidation but balance study with other standards (35% vs. 65%).
• Next session will cover further topics on goodwill and non-controlling interest.