Deck 1: Text Objectives and Introduction to Consolidation

Question 1

One of the advantages of forming a group is the potential for reducing legal liability.

Answer 1

True

Question 2

What is the application of the reporting entity concept to consolidation accounting?

Answer 2

Reporting entity concept:
- Definition: entity where there are users reliant on general purpose financial reports (GPFRs)
- SAC 1 provides factors to be considered in determining the existence of a reporting entity.
- A group that is a reporting entity must prepare consolidated financial statements.
- Some group structures may contain more than one reporting entity.

Question 3

A 'controlled group' includes:

A) controlled entities.
B) associates.
C) joint ventures.
D) all the above.

Answer 3

D

Question 4

A trust cannot be an entity.

Question 5

Discuss the concepts of 'shared control' and 'joint control' in relation to the requirements of Accounting Standard AASB 127.

Question 6

Joint control can exist where share ownership by investing companies is not equal.

Question 7

Discuss the requirements for the preparation of separate financial statements under AASB 127.

Question 8

A reporting entity is a single entity that meets certain criteria.

Question 9

Explain why percentage of ownership an investor has in an investee is not the only consideration when determining which entities must create financial statements.

Question 10

A subsidiary may be:

A) a company.
B) a partnership.
C) an individual.
D) all of the above.

Question 11

In substance,investments in equity securities may be classified as:

A) trading investments at fair value, where increments and decrements in the fair value of the investments are recognised in the income statement.
B) available-for-sale investments.
C) equity investments in subsidiaries, associates and joint venture entities.
D) all of the above.

Question 12

All groups have the same basic organizational structure.

Question 13

For a company to be required to present consolidated financial statements,it must be:

A) a parent entity.
B) a reporting entity.
C) part of a group that is a reporting entity.
D) any of the above.

Question 14

Discuss the potential benefits of conducting economic activity through a group structure

Question 15

All companies must prepare separate financial statements.

Question 16

Equity investments falling within the scope of AASB 139 Financial Instruments: Recognition and Measurement can be measured at fair value.

Question 17

List the potential benefits of group formation.

Question 18

Accounting Standard AASB 127 applies only to the consolidated financial statements of a group.

Question 19

If a parent entity is a reporting entity the group must also be a reporting entity.

Question 20

If a company has control over the financial policies of another entity,it is deemed to have control over the operating policies.

Question 21

Cassius Ltd and Brutus Ltd agreed to merge by forming another company,Casca Ltd,which acquired all the issued capital of the two companies in a share exchange.Cassius Ltd was a much larger company than Brutus Ltd,with several large equity stakeholders,so that the board of Cassius Ltd emerged from the business combination with the power to dominate the operating and financial policies of the merged entity.Based on these facts:

A) Casca Ltd must be the acquiring entity because it acquired the issued capital of Cassius Ltd and Brutus Ltd.
B) Cassius Ltd is the acquiring entity because its management emerges as the dominant power in the merged entity.
C) neither Cassius Ltd nor Brutus Ltd can be the acquiring entity because their equity securities have been acquired by Casca Ltd.
D) none of the above.

Question 22

Assume that Scipio Ltd has a controlling interest in Africanus Ltd.As a result of this relationship:

A) the directors of Africanus Ltd have a fiduciary duty to act in the best interests of Scipio Ltd.
B) because of its controlling interest in Africanus Ltd, Scipio Ltd will take over the management of Africanus Ltd from the board of that company.
C) the board of Africanus Ltd will be dissolved as they no longer have any real power in Africanus Ltd.
D) none of the above.

Question 23

If a parent loses control of a subsidiary during a financial year,that subsidiary's results are ignored for consolidation purposes.

Question 24

Ownership of more than 50% of the voting power will always represent control.

Question 25

Investments in associates (other than those classified as held for sale)will be measured at cost in the consolidated financial statements.

Question 26

In the separate financial statements of a parent entity,investments not classified as held for sale are accounted for:

A) at cost.
B) at fair value.
C) at either cost or fair value.
D) not recorded.

Question 27

What are the major criticisms of the control criterion applied to the definition of the group?

Question 28

A Ltd controls B Ltd who in turn controls C Ltd.B Ltd and the B Ltd group are not reporting entities.A Ltd is a reporting entity.Consolidated financial statements will be required to be prepared for:

A) the A group
B) the B group
C) both the A group and the B group.
D) none of the groups.

Question 29

Control of a subsidiary must be actively exercised (i.e.,the capacity to control does not meet the definition of control).

Question 30

In AASB 3,the indicia of an acquiring entity's power to control the other combining entities in a business combination do not include the power to:

A) exercise more than half of the voting rights in another entity through the site of the voting power or by virtue of an agreement with other investors.
B) appoint or remove a majority of the members of the governing body of the acquired entities.
C) cast the majority of votes at meetings of the governing body.
D) none of the above.

Question 31

Company B is bound by contract to sell all its output to Company A.Company A is deemed to control Company B.