Exciting consolidation scenario!

Joined
Oct 19, 2011
Messages
1
Reaction score
0
When I say exciting, I mean as exciting as consolidation gets..

Company A sells stock (let's say 1 million cardboard boxes) to Company B
The sale is 1,000,000 cardboard boxes at 10p each = £100,000

Company B sells the cardboard boxes to Company C for 50p each, = £500,000

Company C now has a Balance Sheet of Assets £500,000, Bank Loan £500,000

Company A now takes over company C.
Company A is happy to take on the Bank Loan.

How will the consolidation work?
Obviously Company A cannot recognise an asset of £500,000 surely.
How does this cancel out?
Would it go against Reserves?

I'm looking up IFRS's to try find info, but if anyone knows anything it would be greatly appreciated!
 

kirby

VIP Member
Joined
May 12, 2011
Messages
2,445
Reaction score
332
Country
United States
example has a bias in that the assets are "cardboard boxes" and the assumption is that they have a true "intrinsic" value that is low. BUT we have to assume all sales were at "arms length" and made sense at the time. SO if the assets were marketable securites - which change value as market rates do (as do the cardboard boxes). Then it is reasonable to say that the assets now owned by A as it acquires C are at their correct value and so thre is no problem here.
problem only arises if the assets sold by A to B or B to C are sold at a ridiculous price.
 
Joined
Sep 23, 2011
Messages
45
Reaction score
2
example has a bias in that the assets are "cardboard boxes" and the assumption is that they have a true "intrinsic" value that is low. BUT we have to assume all sales were at "arms length" and made sense at the time. SO if the assets were marketable securites - which change value as market rates do (as do the cardboard boxes). Then it is reasonable to say that the assets now owned by A as it acquires C are at their correct value and so thre is no problem here.
problem only arises if the assets sold by A to B or B to C are sold at a ridiculous price.
agreed.........
 
Joined
May 14, 2012
Messages
10
Reaction score
0
When you purchased the company and you apply ifrs 3, you must measured this at fair value, not at cost, and you recognized this in your financial statement ( Company A) at its fair value, which is the arms lenght prince.
 

Triest123

VIP Member
Joined
Feb 12, 2012
Messages
269
Reaction score
51
When I say exciting, I mean as exciting as consolidation gets..

Company A sells stock (let's say 1 million cardboard boxes) to Company B
The sale is 1,000,000 cardboard boxes at 10p each = £100,000

Company B sells the cardboard boxes to Company C for 50p each, = £500,000

Company C now has a Balance Sheet of Assets £500,000, Bank Loan £500,000

Company A now takes over company C.
Company A is happy to take on the Bank Loan.

How will the consolidation work?
Obviously Company A cannot recognise an asset of £500,000 surely.
How does this cancel out?
Would it go against Reserves?

I'm looking up IFRS's to try
find info, but if anyone knows anything it would be greatly appreciated!
=> It's seem unreasonable to combine the assets of company C (which is actually produced
by Company A) at its book value when doing the consolidation.

I can't imagine that Company A will acquire company C. Company A should think how to
sell goods directly to Company C rather than make a stupid decision to buy the company C
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top