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What’s required in the primary statements when a company is being acquired?

Welcome to Query Of The Week

Welcome to this week’s Query Of The Week. Each week our technical team respond to a huge number of client queries and in this segment, we share with you the most common questions that keep coming up time and time again.

In this week’s Query Of The Week, Neil Doran discusses groups and the consolidation process, and in particular, what’s required in the primary statements and when a company is being acquired.

What’s required in the primary statements when a company is being acquired?

If this Query Of The Week was of interest to you, you will also be interested in our Group Audit Considerations for Irish Auditors online CPD course.

Full details for this online course can be found below:

Webinar Duration 1 Hour
Fee €25
Presenter John Murphy – OmniPro
Category Financial Reporting

Query Of The Week – Video Transcript

(Please note that this is a direct unedited transcript of the spoken word as recorded on the video) 

Hello, I’m Neill Doran of OmniPro Practice Support. This week’s query of the week is in relation to groups and the consolidation process, and in particular, what’s required in the primary statements and when a company is being acquired. This question was sent in through our KnowledgeHUB platform where we answer technical queries that you send into us.

Where we see a wider benefit to the accountancy profession and community that’s a quick win and easy to answer we provide that through our Query of the Week service.

I suppose if we look at this query, and here’s the nature of the background to it. This accountant in practice said: “We deal with a company which became a paired holding company during the financial year 2018. It is now required to prepare consolidated financial statements for that financial year. The company previously had no subsidiaries during 2017, but effectively through the acquisition and purchase of a subsidiary during 2018, it has become a small group, and effectively, due to size, now consolidation. What am I required to present in my primary statements for my comparatives and what do I need to include in my consolidated financial statements?”

Well, first off, to begin with, from a consolidation perspective, what primary statements do I need to present?

I have to present a consolidated P and L or income statement. You may also present a consolidated order of comprehensive income statement if necessary and relevant in the context of FRS102. You can avail of the company law exemption under section 304 of Companies Act 2014 whereby you can opt not to present the parent P and L, however, if you choose to do that, you still have to give a note disclosure in the financial statements that you are availing of that exemption and include what is the profit associated with the parent, if relevant. Subsequently, my consolidated balance sheet, my consolidated statement of changes in equity. I will then present a parent balance sheet and a parent statement of changes in equity and a consolidated cash flow statement if the group is a large to medium group whereby there is no availing of exemptions that might be available in the small companies regime.

So that’s the first part. What is required to be presented and for each and every balance sheet item that is there for the parent and for the consolidated, you will be required to present both consolidated group and parent notes. For the presentation of a consolidated P and L or income statement, you will only need to present group notes to support those figures. Acquiring the subsidiary during the year. How do I treat this?

Well, effectively from a P and L perspective, let’s assume that this is a split year. Our end year of our parent is for a full 12 months.

Company A is the parent and that we have a full 12 months period. Subsidiary B shows an eight-month period. We account for this on the date of acquisition. We purchased and bought our new company on the 1st of May. So I only have eight months. While that entity may have traded for a full financial year, as a parent company, it is only from the date of acquisition you account for the acquisition of that company and take in its P and L. So in this circumstance, they have the same year-end and we are taking it for eight months.

So my parent P and L remains the same, my consolidated P and L, however, will have prior comparatives, that is an exact replica of my parent P and L. Why? We didn’t have a subsidiary in the prior year. In the current year, we will take our 12 months of our parent and only that eight months being the 1st of May to the 31st of December. Those eight months of P and L trading will be my numbers which I will take into my consolidated viewpoint. That, in summary, is how you will treat it. You will not have investment subs in the consolidated accounts. You will continue to merge the two balance sheets because they’re bought at the same date and your statement of changes in equity will be a replica of both your balance sheet and the P and L for each of the periods brought in in the consolidated viewpoint.

I hope this answers the question that was being asked. We have an upcoming webinar in the context of group audits and consolidation whereby we will be dealing with this in more detail and particularly how to structure a group audit file for those of you that are auditors and having to deal with this. And what are the issues and things to watch for in the context of group audits. I’m Neill Doran of OmniPro Practice Support and thank you for watching.