Question

1. Merits and shortcomings of the consolidation accounting requirements that recognise the goodwill on acquisition & eliminate the investment in the subsidiary, and the fair value of the issued capital and reserves of the subsidiary at the date of acquisition.

2. Impact of these requirements on the information needs of two key user groups: existing shareholders of the ultimate parent, and a non-controlling interest shareholder of a subsidiary.

Answer 1

1. The various merits and shortcomings of consolidation that recognise the goodwill on acquisition & eliminate the investment in the subsidiary, and the fair value of the issued capital and reserves of the subsidiary at the date of acquisition:-

Merits:-

1. When we combine 2 or more companies, then it helps to increase the goodwill of the company and hence helps in getting larger discounts from vendors and also brings in more customer.If the cost to holding company to acquire subsidiary is more than the value of the company, then it results into capital reserve, otherwise it results in goodwill.

2. Complete consolidation shows the picture of the entire company as a whole from which the Investors can decide whether to invest or not. However, while consolidating, the investments of subsidiary company are removed from holding company to avoid duplication of same kind of items.

3. Since the expertise of all the companies can be employed in one company, the holding company can solve the issues more properly and efficiently. Also, the competition which remains between the holding and the subsidiary company is reduced to a great extent.

4. The fair value of reserves and capital of the subsidiary gets combined with the holding company, which increases the financial strength and capibility of the company or else reduce the losses of the company which does not has profit with the one which has profits.

Demerits

1. Manupulations can be made by consolidating 2 or more companies to show increased losses and avoid taxes. Also, Losses can be made a big reason to avoid payment of dividends.

2. If one company has a good image and it combines with the company which has a bad reputation, the it can spoil the reputation of the company which is earning profits and hence the shareholders of that company can be at a loss as value of shares of that company will start declining.

3. As the employees and shareholders are increased after consolidation, then it may lead to excessive employees which can lead to lower returns to old employees or throwing away by the company of some good employees to reduce there number.

2. Impact of these requirements on the information needs of two key user groups: existing shareholders of the ultimate parent, and a non-controlling interest shareholder of a subsidiary.

Impact for Parent company:-

The shareholders will refer to the financial statements after consolidation to know a clear picture as to how the profits will be distributed and how are they affected by the consolidation. If the profits are reduced, then there is a chance that the shareholders will have to suffer the losses. Also, the Assets and Liabilities after consolidation can be checked from the financial statements. Suppose the subsidiary company has huge debt as a liability in its balance sheet and the same is combined with the parent company (ie. parent company is holding some percentage in the subsidiary company in the debt) then the liability of the Parent to that extent of interest on debt will increase and incase of liquidation, the debenture holders will be paid first which can threaten the credibility of shareholders.

Thus in the above way, the information can affect the parent company.

Non Controlling Interest shareholder of Subsidiary:-

At the time of consolidation the Minority Shareholders are concerned that how much they receive in return of their Investment. It the value of there Investment is more than what they are receiving on conssolidation then it means they are at loss. So this requirement can depict a clear picture as to what is the financial position of the company after consolidation and what benefit will the subsidiary have incase of consolidation, if it is a loss, then the shareholders may not be a part of this.

Hope this helps, it is completely as per my practical experience