When a company has control of another company, the controlee company is said to be the subsidiary of the controlling company. The controlling company is said to be the parent of the controlee company.
When the subsidiary-parent relationship is established, the parent company has to prepare two sets of accounts, one set as a single company and the other set as a group of companies. In the group financial statements, the parent company must consolidate its financial statements with the financial statements of its subsidiary. This process is known as consolidation and the financial statements are known as consolidated financial statements.
A company ABC Co. ABC Co. This means that ABC Co. First of all, ABC Co. This is because although ABC Co. For RST Co. At last, ABC Co. This means ABC Co. Therefore, ABC Co. When a company acquires shares in a subsidiary company, it can pay a consideration to the shareholders of the subsidiary company in many forms.
The simplest form of consideration paid to a subsidiary company is direct cash. However, the parent company may also pay the subsidiary using its own shares. For example, the parent company may pay 1 share in parent company for every 10 shares in the subsidiary company.
Whenever an acquisition takes place, it is going to have either one or the other of the two above types of consideration. It may have both as well but one of the two above forms will always be there.
Consideration paid to subsidiary company can also be in deferred form. For example, the parent company may promise to pay the subsidiary company at some point in the future.
The actual amount of consideration in all forms is determined and the terms of payment are decided. Divestopedia Explains Deferred Consideration A variety of factors influence the actual negotiated price.
Payment may be in the form of cash, debt, assumption or payment of liabilities, stocks, or future payouts. There will be a payment up front in the form of equity in the buying firm or a promise to pay cash depending on the achievement of profit targets or turnover targets.
In periods of poor liquidity, a deferred consideration system helps to get the deal through. However, the seller faces a risk and tries to secure a high upfront payment, sometimes even in exchange for a reduced price. A seller may seek a bank guarantee or collateral whereby no assignation can take place without the seller's consent.
Sometimes deferred consideration may be set off by the buyer against indemnities payable by the seller. If the consideration is contingent to certain conditions being met before payment can be made, then the parties agree to a mechanism for payment.
The funds may be placed in an account and released as per the terms agreed. I do not represent Opentuition and not a teacher so there is a chance I might be wrong. I am unsure if I was allowed to answer the queries. There is no edit or delete button so now I think I just have to stick with it.
I am not sure exactly how it works. Anyways, best of luck for your exams. Written by a member of the DipIFR examining team. IFRS 3 introduces: Restrictions on the expenses that can form part of the acquisition costs Principles for the treatment of contingent consideration A choice in the measurement of non-controlling interests which have a knock-on effect to consolidated goodwill , considerable guidance on recognising and measuring the identifiable assets and liabilities of the acquired subsidiary, in particular the illustrative examples discuss several intangibles, such as market-related, customer-related, artistic-related and technology-related assets.
Acquisition costs All acquisition costs, even those directly related to the acquisition such as professional fees legal, accounting, valuation, etc , must be expensed.
Contingent consideration classified as an asset or a liability that: — is a financial instrument and is within the scope of IFRS 9 shall be measured at fair value, with any resulting gain or loss recognised either in the statement of profit or loss, or in other comprehensive income in accordance with that IFRS — is not within the scope of IFRS 9 shall be accounted for in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets , or other IFRSs as appropriate.
Note that although contingent consideration is usually a liability, it may be an asset if the acquirer has the right to a return of some of the consideration transferred if certain conditions are met. Or the working can be shown as:. Scenario 1. Scenario 2. The following information is relevant: i At the date of acquisition, Savannah had five years remaining of an agreement to supply goods to one of its major customers. Related Links.
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