(166)-ACCOUNTING RATIO ANALYSIS

Accounting Ratio Analysis Return on Capital Employed (ROCE) It is impossible to assess profits or profit growth properly without relating them to the amount of funds (capital) that were employed in making the profits. The most important profitability ratio is therefore return on capital employed (ROCE), which states the profit as a percentage of the amount of capital employed. ROCE = Profit on ordinary...

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(165)-PROFITABILITY AND RETURN ON CAPITAL RATIOS

Profitability and Return on Capital Ratios Profit on ordinary activities before taxation is generally thought to be a better figure to use than profit after taxation, because there might be unusual variations in the tax charge from year to year which would not affect the underlying profitability of the company’s operations. Another profit figure that should be calculated is PBIT, profit before interest...

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(164)-ACCOUNTING RATIO ANALYSIS

Accounting Ratio Analysis Importance of Ratio Analysis If we were look at a balance sheet or profit and loss account, how would you decide whether the company was doing well or badly? Or whether it was financially strong or financially vulnerable? And what would be you looking at in the figures to help you to make your judgment?Ration analysis involves comparing one figure against another to produce...

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(163)-SUMMARY FOR CONSOLIDATED ACCOUNTS

Summary for Consolidated Accounts In our previous posts we discussed about consolidated accounts, you need to know following things about consolidated accounts. The concept of a group and introduced several important definitions. The principle regulations governing the preparation of group accounts. The machines of preparing simple consolidated balance sheet. And procedures have been described for...

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(162)-A TECHNIQUE OF CONSOLIDATION

A Technique of Consolidation In our previous posts we have now looked at the topics of cancellation, minority interests and goodwill arising on consolidation. It is time to set out an approach to be used in tacking consolidated balance sheets. The approach we recommend consists of three steps. Step one - Cancel items common to both balance sheets. Step two – Produce working for minority interests....

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(161)-GOODWILL AND INTANGIBLE ASSETS

Goodwill and Intangible Assets Goodwill must be amortized if it is expected to last less than 20 years. Otherwise, goodwill is to remain in the balance sheet. Navigate goodwill is shown as a credit in the balance sheet just below positive goodwill. If goodwill is amortized the consolidation adjustment required each year is as follows.Debit – Consolidated profit and loss accountCredit – Provision for...

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(160)-GOODWILL AND PRE-ACQUISITION PROFITS

Goodwill and Pre-acquisition Profits Assuming instead that S Ltd has earned profits of 8000$ in the period before acquisition, its balance sheet just before the purchase would like as follows. Net tangible assets 40000$Share capital 40000$Reserves 8000$ If H Ltd now purchases all the shares in S Ltd it will acquire net tangible assets worth 48000$ (share capital + reserves) at a cost of 60000$. Clearly...

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(159)-GOODWILL ARISING ON CONSOLIDATION

Goodwill Arising on Consolidation When a company X Ltd wishes to purchase shares in a company Y Ltd it must it must pay the previous owners of those shares. The most obvious form of payment would be in cash. Suppose X Ltd purchases all 40000$ 1 shares in Y Ltd and pays 60000$ cash to the previous share holders in consideration. The entries in X Ltd’s books would be: Debit – Investment in Y Ltd at...

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(158)-GOODWILL ARISING ON CONSOLIDATION

Goodwill Arising on Consolidation In the group accounts we have looked at so far the cost of shares acquired by the parent company has always been equal to the nominal value of those shares. This is seldom the case in practice and we must now consider some more complicated examples. To begin with, we will examine the entries made by the parent company on its own balance sheet when it acquired shares....

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(157)-RECOMMENDED TECHNIQUE FOR DEALING WITH MINORITY INTERESTS

Recommended Technique for Dealing with Minority Interests In more complicated situations the following technique is recommended for dealing with minority interests. Cancel common items in the draft balance sheets. If there is a minority interest, the subsidiary company’s share capital will be a partly cancelled item. Ascertain the proportion of ordinary shares and the proportion (possibly different)...

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(156)-MINORITY INTERESTS IN GROUP ACCOUNTS

Minority Interests in Group Accounts It was mentioned earlier that the total assets and liabilities of subsidiary companies are included in the consolidated balance sheet, even in the case of subsidiaries which are only partly owned. A proportion of the net assets of such subsidiaries in fact belong to investors from outside the group. Financial reporting standards (FRS) defines minority interest...

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(155)-PART CANCELLATION IN GROUP ACCOUNTS

Part Cancellation in Group Accounts An item may appear in the balance sheets of a parent company and its subsidiary, but not at the same amounts. The parent company may have acquired shares in the subsidiary at a price grater or less than their nominal value. The asset will appear in the parent company’s accounts at cost, while the liability will appear in the subsidiary’s accounts at nominal value....

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(154)-CANCELLATION AND PART CANCELLATION

Cancellation and Part Cancellation The preparation of a consolidated balance sheet, in a very simple form, consists of two procedures. Take the individual accounts of the holding company and each subsidiary and cancel out items which appear as an asset in one company and a liability in another. Add together all the uncancelled assets and liabilities throughout the group. Items requiring cancellation...

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(153)-REQUIREMENTS TO PREPARE GROUP ACCOUNTS

Requirements to Prepare Group Accounts Size Criteria Any of the following size criteria for small and medium sized groups must me met. Aggregate turnoverSmall- Less than 5.6 million $Medium sized- Less than 22.8 million $ Aggregate gross assetsSmall- Less than 2.8 million $Medium sized- 11.4 million $ Aggregate number of employeesSmall- Less than 50 million $Medium sized- 250 million $ The qualifying...

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(152)-REQUIREMENT TO PREPARE GROUP ACCOUNTS

Requirement to Prepare Group Accounts The companies act introduced a completely new provision exempting some groups from preparing consolidated accounts. There are two grounds. Similar groups can claim exemptions on grounds of size Parent companies (except for listed companies) whose immediate parent is established in some countries need not prepare consolidated accounts. The accounts must give the...

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(151)-CANCELLATION AND PART CANCELLATION

Cancellation and Part Cancellation The preparation of a consolidated balance sheet, in a very simple form, consists of two procedures. Take the individual accounts of the holding company and each subsidiary and cancel out items which appear as an asset in one company and a liability in another. Add together all the uncancelled assets and liabilities throughout the group. Items require cancellation...

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(150)-SUMMARIES RELATING TO EXCLUSION OF A SUBSIDIARY

Summaries Relating To Exclusion of a Subsidiary The following explanations are summaries the rules relating to exclusion of a subsidiary. Reason 1 Serve long term restrictions hindering exercise of parent’s rights Accounting Treatment Balance sheet: equity method up to date of serve restrictions less amounts written off if permanent fall in value. Profit and loss account: dividends received only Reason...

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(149)-INFORMATION DISCLOSED IN THE GROUP ACCOUNTS

Information Disclosed In the Group Accounts The following information should be disclosed in the group accounts. Its net assets Its profit or loss for the period Any amounts included in the consolidated profit and loss account in respect of, dividends received by the holding company from the subsidiary, writing down the value of the investment. The reason of exclusion The names of subsidiaries excluded...

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(148)-EXCLUSION OF SUBSIDIARY UNDERTAKINGS FROM GROUP ACCOUNTS

Exclusion of Subsidiary Undertakings from Group Accounts Where a subsidiary is excluded from group accounts, financial reporting standards (FRS) lays down supplementary provisions on the disclosures and accounting treatment required. Where a subsidiary is excluded on group accounts should include separate financial statements for that subsidiary including: A note of the holding company’s interest...

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(147)-EXCLUSION OF SUBSIDIARY UNDERTAKINGS FROM GROUP ACCOUNTS

Exclusion of Subsidiary Undertakings from Group Accounts Financial reporting standards (FRS) states that a subsidiary must be excluded from consolidation in the following circumstances. Serve long term restrictions are substantially hindering the exercise of the parent’s rights over the subsidiary’s assets or management. The group’s interest in the subsidiary undertaking is held exclusively with a...

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(146)-EXCLUSION OF SUBSIDIARY UNDERTAKINGS FROM GROUP ACCOUNTS

Exclusion of Subsidiary Undertakings from Group Accounts The companies act provides that a subsidiary may be omitted from the consolidated accounts of a group if any of the following apply. In the opinion of the directors, its inclusion is not material for the purpose of giving a true and fair view; but two or more undertakings may be excluded only if they are not material taken together. There are...

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(145)-CONSOLIDATION

Consolidation An undertaking S is a subsidiary undertaking of H of: S is a subsidiary of H, i.e. H is a member of S and either holds pr controls > 50% of the voting rights or controls the board; S is a subsidiary because it is a subsidiary of a subsidiary of H; H has the right to exercise a dominant influence over S; H has a participating interest in S and either actually exercises a dominant influence...

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(144)-IMPORTANT DEFINITIONS FOR GROUP ACCOUNTING

Important Definitions for Group Accounting Control Control is the ability of an undertaking to direct the financial and operating policies of another undertaking with a view to gaining economic benefits from its activities.Interest held on a long term basisAn interest held on a long term basis is an interest which is held other than exclusively with a view to subsequent resale.Interest held exclusively...

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(143)-DOMINANT INFLUENCE

Dominant Influence Financial reporting standards (FRS) defines dominant influence as influence that can be exercised to achieve the operating and financial politics desired by the holder of the influence, notwithstanding the rights or influence of any other party. The standard then distinguishes between the two differences situations involving dominant influence. The right to exercise a dominant influence...

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(142)-THE REQUIRED TO CONSOLIDATE

The Required To Consolidate Financial reporting standards (FRS) require a parent undertaking to prepare consolidated financial statements for its group unless it uses one the exemptions available in the standard. Consolidation is defined as: The process of adjusting and combining financial information from the individual financial statements of a parent undertaking and its subsidiary undertaking to...

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