1. What is a subsidiary?

A subsidiary is an entity that is controlled by another entity, a parent.

2. What is meant by the term "control"?

An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

3. For what purposes are the consolidated financial statements prepared? Possible objectives are:
- Supply of relevant information
- Supply of comparable information
- Accountability of management
- Reporting of risks and benefits

4. What are the key elements of control?

There are 3 key elements:

- Power over the investee

- Exposure or rights to variable returns from the parent's involvement with the subsidiary

- The ability to use the power over the subsidiary to affect the amount of the parent's returns.

Controlled entities: the consolidation method

REVIEW QUESTIONS

1. Explain the purpose of the pre-acquisition entries in the preparation of consolidated financial statements.

The purpose of the pre-acquisition entry is to:

- prevent double counting of the assets of the economic entity
- prevent double counting of the equity of the economic entity
- recognise any gain on bargain purchase

2. A simple example such as that below could be used to illustrate these points:

A Ltd has acquired all the issued shares of B Ltd. The balance sheets of both companies
immediately after acquisition are as follows:

The balance of the "Shares in B Ltd" account can be changed to introduce goodwill/ gain on bargain purchase amounts.

6. At the date the parent acquires a controlling interest in a subsidiary, if the carrying amounts of the subsidiary's assets are not equal to fair value, explain why adjustments to these assets are required in the preparation of the consolidated financial statements.

AASB 3, paragraph 18, requires that identifiable assets and liabilities of the subsidiary be shown at fair value. The standard-setters believe that the fair value of the assets and liabilities provides the most relevant information to users.

Even though the standard refers to an allocation of the cost of a business combination, the standard does not require the identifiable assets and liabilities acquired to be recorded at cost.

The only asset acquired that is not measured at fair value is goodwill.

The fair value approach is emphasised by the required accounting for any bargain purchase on combination. It is not accounted for as a reduction in the fair values of the identifiable assets and liabilities acquired such that these items are recorded at cost.

Instead, the fair values are unchanged and the excess is recognised as a gain.

8. What is the purpose of the business combination valuation entries?

The purpose of these entries is to make consolidation adjustments so that in the consolidate balance sheet the identifiable assets, liabilities and contingent liabilities of the subsidiary are reported at fair value. This is to fulfil step 3 of the acquisition method required to account for
business combinations by AASB 3.