Deck 28: Consolidated Financial Statements

Question 1

The link between power of an investee and returns is essential to having control. Returns are defined broadly and include all of the following, except:

A) Distributions of economic benefits
B) Changes in the value of the investment
C) Tax benefits
D) Remuneration
E) None of the above
F) Two of the above

Answer 1

None of the above

Question 2

Which of the following is not a requirement for determining control?

A) Power over the investee
B) Majority share ownership
C) A link between power and returns
D) Exposure or rights to variable returns from the investee

Answer 2

Majority share ownership

Question 3

Consolidation is based on?

A) Majority voting rights
B) The size of the subsidiary
C) Control of an entity over another entity
D) The location of the parent and subsidiary entity

Answer 3

Control of an entity over another entity

Question 4

King Entity and Queen Entity each hold 40% of the shares of Jack Entity. An agreement between King and Queen requires that they must reach unanimous consent to make relevant decisions related to Jack. What type of relationship do King and Queen have with Jack?

A) King should consolidate Jack; Queen should use the equity method
B) Queen should consolidate Jack; King should use equity method
C) King and Queen should both consolidate Jack
D) King and Queen should both use equity method for exerting significant influence

Question 5

Assessment of power is made at the ______ level

A) Entity
B) Cash-generating unit
C) Activity
D) Management

Question 6

Match the reporting procedure with level of control correct

-IFRS 9 - Financial instruments

A) Joint Control
B) Lack of significant Influence
C) Control alone
D) Significant influence

Question 7

Match the reporting procedure with level of control correct

-IAS 28-Accounting for an Investment (only)

A) Joint Control
B) Lack of significant Influence
C) Control alone
D) Significant influence

Question 8

Match the reporting procedure with level of control correct

-IFRS 11 - Define type of arrangement.

A) Joint Control
B) Lack of significant Influence
C) Control alone
D) Significant influence

Question 9

Match the reporting procedure with level of control correct

-IFRS 10 - Consolidation

A) Joint Control
B) Lack of significant Influence
C) Control alone
D) Significant influence

Question 10

Which of the following is the best criteria to use in determining whether a firm is a parent of another entity?

A) The firm owns a majority of voting shares
B) The firm often receives a dividend from its investment
C) There is no link between the investor and power over relevant activities
D) The firm has control over the entity

Question 11

Control involves all of the following except:

A) power over the investee
B) exposure, or rights, to variable returns from the investee
C) a link between power and returns
D) the right to influence management

Question 12

When assessing control, which of the following does the investor consider?

A) The purpose and design of the investee to determine its relevant activities
B) How decisions about the relevant activities are made
C) Who has power over those activities
D) Who has rights to returns from the investee
E) All of the above

Question 13

Pillow Entity (PE) acquired 45% of the voting rights of Sofa Entity (SE). The remaining voting rights are held by thousands of shareholders, none individually holding more than 1% of the voting rights. There are no agreements among other shareholders to make collective decisions. PE is able to direct the relevant activities of SE and to use its power to affect its returns from SE. What type of relationship does PE have with SE?

A) Majority voting rights
B) Influence over the investee
C) Control of an entity
D) The location of the parent and subsidiary entity

Question 14

A subsidiary entity has been informed that the parent entity will not be presenting consolidated financial statements, and does not object. The parent's debt and equity instruments are not traded in a public market, the parent is in the process of filing an IPO, and the ultimate parent prepares consolidated financial statements in accordance with IFRS. This parent entity may choose not to file a consolidated financial statement for the subsidiary entity.

Question 15

In some situations, a parent company may consolidate only a portion of a legal entity.

Question 16

In certain circumstances, a majority vote is not required to determine power of another entity, even in the absence of contractual arrangements that give power.

Question 17

The fundamental principle in IFRS 10 is that a parent is required to consolidate all of its subsidiaries.

Question 18

Control is usually assessed over a legal entity, but also may exist at the level below the legal entity, referred to as a silo, and, as a result, in the consolidation of specific assets and liabilities, not only the entire legal entity.

Question 19

The link between power over an investee and returns is not a consideration when determining control.

Question 20

Power with a majority of voting rights exists if, for example, relevant activities are directed by vote or a majority of the governing body is appointed by vote.

Question 21

Consolidation is the process of combining the financial statements of the parent with those of its subsidiaries as if they represent a single entity.

Question 22

When a parent loses control of a subsidiary and a noncontrolling interest is retained, the parent should measure that retained interest at fair value when control is lost and recognize a gain or loss in profit or loss. (True)

Question 23

Changes in noncontrolling interests without loss of control by the parent are recognized in P&L.

Question 24

Entity ABC and Entity XYZ together form Elemenope Entity, a construction company. Entity ABC has control over the house construction, and Entity XYZ has control over the financing activities. Both are considered relevant activities. Should either entity consolidate Elemenope. If so, describe how you came to that conclusion. (The process is more important than the specific answer).

Question 25

Two unrelated entities Armando Entity (AE) and Belanto Entity (BE) each own 30% of the voting rights of Sahara Entity (SE). The remaining voting rights are held by thousands of shareholders, none individually holding more than 1% of the voting rights. The contractual arrangement between AE and BE specifies that their unanimous consent (the casting of their combined 55% voting rights) is required to make decisions about the relevant activities of SE. There are no other agreements among other shareholders to make collective decisions. What type of relationship does AE and BE have with SE?

Question 26

Tamaki Entity (TE) holds 47 percent of the voting rights of Fenton Entity (FE), with the rest of the voting rights held by thousands of shareholders, none individually holding more than 1 percent of the voting rights. There are no arrangements between shareholders to consult each other or make collective decisions. What is TE's relationship with FE?

Question 27

Granada Entity (GE) holds 45 percent of the voting rights of Palermo Entity (PE). Eleven other investors each hold 5 percent of the voting rights of the investee. GE has entered into a shareholder agreement that grants GE the right to appoint, remove and set the remuneration of management responsible for directing the relevant activities of PE. What is GE's relationship with PE?

Question 28

Velicio Entity (VE) owns 75% of the voting rights of Marikes Entity (ME). VE decided to sell a 25% interest in ME to the non-controlling shareholders in exchange for cash of $480,000. As of the date of this transaction ME has net assets of $2,200,000. How should VE account for the sale of subsidiary's shares in the consolidated financial statements?