Exciting consolidation scenario!


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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!
 
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kirby

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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.
 
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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.........
 
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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.
 
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Triest123

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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
 

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