Conditions for consolidation
As per FRS110, a parent with control over subsidiaries is required to present a consolidated financial statement. However, as we will soon find out, neither the concept of “control” nor the requirement to consolidate is always straightforward.
To summarize paragraph 4(a) of FRS 110, all following conditions must be fulfilled in order for exemption to be allowed:
- The entity itself is a child or sub child of another parent
- It is not listed in stock exchange
- It is not in process of issuing any debt or equity
- It’s ultimate parent is performing the consolidation
Although the above can be interpreted as only the ultimate holding company requires consolidation, there may be cases where the ultimate parent is listed in US while the child or sub-parent is listed in Singapore. The difference in accounting standards will mean that even the Singapore listed entity will require to consolidate even if it is not the ultimate holding company.
Identifying the acquirer
This is another challenging topic that should be considered on a case-by-case basis. As per FRS 103, the rule of the thumb is that the acquirer is typically the entity that issues the shares or cash or both.
It can however, get quite complex, especially in cases of reverse acquisition where the acquirer is also the entity whose shares have been acquired. In such cases, it is paramount to establish which entity gains control after the acquisition and to prepare the consolidation from that entity’s viewpoint.
Cost of Acquisition
As per FRS 103, cost of acquisition is the aggregate of the following values at acquisition dates:
- Fair value of net assets acquired
- Liabilities incurred by acquirer to pay the ex-owners
- Equity instruments issued by acquirer
It should not however, include any administrative expenses such as professional fees incurred during the process of acquisition or budgeted restructuring costs after the acquisition.
Any probable contingent consideration should be recognized as part of acquisition cost at fair value and any subsequent fair value adjustment as a result of new information can be within 1 year. After the measurement period, fair value changes will be reflected in P&L.
Another key word here is “probable”. If the contingent consideration is subjected to a profit target, then the fair value must be adjusted base on a percentage of the likelihood of profit target being achieved.
Typical double entry to recognize cost of acquisition is as follows:
| DR | Cost of Investment |
| CR | Cash |
| CR | Provision for contingent payment |
Take note that the entry above is not a consolidation entry, but still at legal entity level. At consolidation level, the “Cost of Investment” line will be off set against the equity portion of acquiree. This will be elaborated in future posts.
All materials produced on this website, including this article, is based on author’s best interpretation of accepted accounting standards and his own experience. Any information bias, inaccuracies, misstatements, obsolesce are unintentional and should strictly not be held liable against the author. The author is not responsible for any losses, monetary or non-monetary, as a result of using these materials.
Derrick How 