TOPIC 1: GROUP ACCOUNT:BASIC

1.  What the definition the terms in group accounting?

       a.  What is holding Company

Section 5A Company Act 1965 states that a cooperation shall, subject to subsection (3), deemed to be subsidiary of another cooperation if :

(a)  The other cooperation : 

·         Controls the composition of the board of directors of the first mention corporation

·         Controls more than half that of the voting power of the first mentioned corporation: or

·         Holds more than half of the issued share capital of the first – mentioned corporation (excluding any part thereof which consists of preferences shares ) or  The first mentioned corporation is a subsidiary of any corporation’s subsidiary

       b. What is Subsidiaries companies

                      In determining whether one corporation is a subsidiary of another cooperation :

a)    Any shares held or power exercisable by that other corporation in a fiduciary shall be treated as not held or exercisable by it :

b)    Subject paragraph (c) and (d), any shares held or power exercisable :

                                       i.        by any person as a nominees for that other corporation (except where that other corporation is concerned only in fiduciary capacity) or :

                                      ii.        by or by a nominee for, a subsidiary of that other corporation, not being a subsidiary which is concerned only in fiduciary capacity, shall be treated as held or exercisable by that other corporation :

c)    any shares held a power exercisable by any person by virtue of the provision  of any debentures of the first mentioned corporation or of trust deed securing any issue of such debentures shall be disregarded and

d)    any shares held power exercisable by, or nominee for, that other corporation or ts subsidiary (not being held or exercisable as mentioned in paragraph (c) ) shall be treated as not held or exercisable by that other corporation if the ordinary business of that other corporation or power is exercisable as a foresaid by way of security only for the purpose of transaction entered into the ordinary course of that business.
 

       c.  What is Cost of Control?

·         The expression cost of control could be used instead of 'goodwill'. this expression probably captures the essence of the purchase of the shares better than calling it goodwill. it is precisely for the sake of gaining control of the assets of the company that the shares are bought. however, the expression 'goodwill' is more widely used and is correspondingly the one that will be used through the remainder of this book.
 

·         The process or activity on controlling costs associated with an activity, process, or company.

      

      d.  What is Non-Controlling Interest/Minority interest?

 

·         As known as non-controlling interest. It is the portion of a subsidiary corporation’s stock that is not owned by the parent corporation.

·         Equity of all stockholders (shareholders) who do not hold a controlling interest in a firm.

·         In the consolidated-accounts of a holding firm, the subsidiaries in which the firm does not hold controlling interest.

·         The minority interest in a business combination refers to that portion of the profit or loss and net  assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.

·         In terms of inclusion, all of the net assets of the acquiree are included in the combined entity balance sheet because the acquirer controls them. The minority interest element is shown as a separate item, as partly financing those net assets. In the consolidated income statement, all acquired profit is highlighted but a deduction is then made for the minority interest element.

2.  What the purpose of consolidated financial statement?

1.    Reporting the financial condition and operating result of a consolidated business group, which is considered as a single entity comprised of more than one companies under a common control (also counting entities other than “companies”)

2.    To provide financial information about a parent and its subsidiaries as a single economic entity.

3.    To show the financial position of the group as a whole by showing the economic resources controlled by them, the obligations of the group and the results the group achieves with its resources.

4.    To understand the position of the group as a whole and also the inter flow of funds between parent and subsidiary companies.
 

3.  What the procedures in preparing group account?
      a. How to indicate the cost of investment?

-  When the cost investment more than asset were acquired, holding got GOODWILL
-  When the cost investment less than asset were acquired, holding got CAPITAL RESERVE
-  Cost investment is amount paid by holding to acquired subsidiary


      b.  How to treat goodwill if:

1.     Retain goodwill at cost?

Goodwill is treated as non depreciable asset that is it WILL APPEAR in the consolidated balance sheet as non-current assets

2.     Amortize goodwill over a number of years?

Goodwill is capitalized and its cost is written off (amortized) against profits over a number of years. The difficulty here is to determination of the useful life.

 

Formula:

Total Goodwill x period

Amortized life

 

Where: Amortized life = year given in the question

                        Period = Year Acquired - Year SOFP

 

e.g: Total goodwill       RM550

        Year amortized    5 years

        Year Acquired  2009

        Year SOFP  2010

 

Calculation:

RM550  x  I year  = RM110

5 years

 

Effect:

CSOFP  Goodwill (RM550-RM110)               = RM440

Consolidated Profit & Loss                =  RMxxx - RM110

 

 

 

3.  Write off goodwill immediately against reserves?

Goodwill is written off against the group’s profits in the year of acquisition of the subsidiary. This is the most conservative method as it assumes that there is no relationship between the goodwill and future performance of the subsidiary.

 Refer example above:

Effect:
CSOFP Goodwill                                    = RM0
Consolidated Profit & Loss             = RMxxx - RM550

 

4.  How the pro forma account?


Follow this example:

On 1^st January 2002, Mama Bhd bought 100% control on Mia Bhd at RM 32,000.  At the same date, Mia have credit balances as below:

            General Reserves      RM10, 000

            Profit and loss          RM10,000

Below are the statements of financial position of two companies as at 31 December 2009

	Mama Bhd	Mia Bhd
Equity and  Liability :
Ordinary shares  @ RM1.00	50,000	20,000
Profit and loss	60,000	35,000
General Reserves	50,000	15,000
Current Liability	22,000	50,000
	182,000	120,000
Assets :
Other  asset	150,000	120,000
Investment on Mia Bhd	32,000	-
	182,000	120,000

 

You are required to prepare

1.      Cost of Control Account

2.      Consolidated Profit and Loss Account

3.      Consolidated General reserve account

4.      Consolidated Statement of financial position of Mama Group as at 31.12.2009


Suggestion Answer:

Cost Control Account

Investment Capital Reserve	32,000 8,000	OS          P&L             GResv	20,000 10,000 10,000
	40,000		40,000

 

                        Profit & Loss - Mia

Coc CSOPF	10,000 25,000	B/D	35,000
	40,000		40,000

  

General Reserve - Mia         

Coc CSOP	10,000 5,000	B/D	15,000
	15,000		15,000

MamaMia Group Bhd Consolidated Balance Sheet as at 31/12/2009 
Current Assets :
Other Assets	270,000
	270,000
Financed by :
Ordinary Shares	50,000
CP&L (25+60) C Gen. Reserve (5+50) Capital Reserve	85,000 55,000   8,000
Current Liability :
Creditors	72,000
	270,000