What is the primary criterion for determining whether or not to consolidate an entity?

Accounting for Group Structure
Q1. On consolidation how is the goodwill or gain on bargain purchase determined?
The measurement of the goodwill or gain/bargain on purchase is the fourth step in the process of accounting for business consolidation. Determining the goodwill/gain or bargain on purchase is a process that applies calculation. The basic value for the calculation is the fair value of the consideration under transfer. The accountant then calculates the amount of non-controlling interests and adds to fair value of the consideration. The accountant also adds the fair value of the equity interest that the acquiree held previously (before the consolidation. The accountant determines the fair value of the assets (identifiable) that the company has acquired during the consolidation, and the liabilities that the business has assumed. He deducts this value, and the result is the goodwill or the bargain on purchase as at the date of the acquisition. If the final result of the calculation is a positive figure, it is called goodwill. However, if the result is a negative figure, the company does not consider it as goodwill, but a gain on bargain purchase.
Q2. Briefly explain the difference between entity, proprietary and parent-entity concepts and identify which concept is applied within New Zealand
The entity approach to consolidation treats the firm as a separate economic entity, rather than considering it as an institution where the shareholders have their rights. The way the entity approach treats the firm is the direct opposite of the proprietary approach, which considers the firm as an extension of the owners. The proprietary approach, therefore, considers the assets and liabilities of the firm as things that belong to the shareholders, which is not the case with the entity approach to consolidation. The parent entity approach, on the other hand, considers the parent (controlling entity) as a person who lacks the direct ownership of the firm. However, the parent has the power (ability) to control all the assets and liabilities of the firm. In addition, the entity approach to consolidation considers the controlling and non-controlling shareholders as two different entities. Each of the different shareholder groups has its own equity in the entity that undergoes consolidation. The proprietary approach has a pro-rata consolidation. In the consolidation, the parent can only consolidate his proportionate share. The share is usually less than the sum of the subsidiary assets and liabilities of the firm. The parent entity approach considers the non controlling shareholders separately in the financial statements.
New Zealand uses the entity approach, which is the current approach to company consolidation. In New Zealand, the process of consolidation treats the firm as a separate entity, without considering the rights/claims that the shareholders attach to it. New Zealands consolidation focuses on the entity that is under consolidation. In addition, the countrys consolidation treats the controlling and non-controlling shareholders as separate entities during the process of consolidation. Each of the shareholder categories is entitled to a different equity. Furthermore, the consolidation process in New Zealand includes the sum of the assets, liabilities, expenses and revenues in financial statements. During the inclusion, the controlling and non-controlling shareholders do not receive any special treatment.
Q3. What is the primary criterion for determining whether or not to consolidate an entity?
The willingness or ability of one entity to support another entity during financial distresses is the primary criterion for determining the entities to consolidate. When exigencies occur, the subsidiary entities usually require the support of the parent entities. Sometimes, however, the parent entities may not be willing to assist the subsidiaries in such situations, compelling businesses to consolidate the subsidiary entities. There are cases, however, when a business may not consolidate its subsidiaries, even if the parent entity is not willing to assist the subsidiary entity during times of financial problems. One of such situations is when the parent entity deals in a different business from the subsidiary entity. The parent entity could be doing manufacturing business, whereas the subsidiary entity does banking. Secondly, a firm may not consolidate its subsidiary entity when it is sure that it will not suffer of any financial problems during difficult economic times.
Q4. According to NZ IFRS 3 ‘Business Combinations, how should a gain on bargain purchase arising on consolidation be treated?
NZ IFRS 3 “Business combinations” explains that accountants should treat a gain on bargain purchase as part of the firms profits or losses. In the process of determination of the goodwill or gain on bargain purchase, the result qualifies as the latter (gain on bargain purchase), if it is a negative value. In the financial records, the accountant recognizes the gain on bargain purchase by crediting the value. The gain on bargain purchase thus appears on the credit side of the financial records. A company can acquire another entity at a discount. The companys accountants must reassess the process of identification and measurement of all the assets and liabilities of the “acquiree”. Any excess that remains after the reassessment is either a profit or a loss to the firm, and the gain on bargain purchase is part of it.

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