Electronic
Presentations
in Microsoft®
PowerPoint®
Prepared by
Peter Secord
Saint Mary’s
University
© 2003 McGraw-Hill
Ryerson Limited
Chapter 9
Consolidated Cash Flows:
Ownership Issues
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
2
Consolidated Cash Flows: Ownership Issues
• Chapter Outline
– Consolidated cash flow statement
– Ownership changes
• Purchase discrepancy
• Step acquisitions
• Reductions in parent shareholding
– Subsidiary Preferred Shares
– International View
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
3
Consolidated Cash Flows
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
4
Consolidated Cash Flows
• The cash flow statement is one of the primary
financial statements required for companies
which report under Canadian GAAP
• When a consolidated cash flow statement is
prepared, it must include the operating,
investing, and financing cash flows of the
company, to the extent that these cash flows
have taken place outside the corporate group
• The cash flow effects of intercorporate
investments and divestitures must be reported
as a part of this statement
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
5
Consolidated Cash Flows
• What items are unique to the preparation of
consolidated cash flow statements?
– What cash flow effect does the acquisition of an
intercorporate investment have for the consolidated
financial statements?
– What special disclosures are required regarding the
acquisition of an intercorporate investment?
– What non cash items of revenue and expense lead
to adjustments in the computation of consolidated
cash flow from operations?
– What are the effects of dividends paid by
subsidiaries?
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
6
Consolidated Cash Flows
• What cash flow effect does the acquisition of
an intercorporate investment have for the
consolidated financial statements?
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
7
Consolidated Cash Flows
• What cash flow effect does the acquisition of
an intercorporate investment have for the
consolidated financial statements?
– cash payments to acquire equity or debt
instruments of other enterprises and interests in
joint ventures must be disclosed in the consolidated
cash flow statement
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
8
Consolidated Cash Flows
• What cash flow effect does the acquisition of
an intercorporate investment have for the
consolidated financial statements?
– cash payments to acquire equity or debt
instruments of other enterprises and interests in
joint ventures must be disclosed in the consolidated
cash flow statement
– as the intercorporate investment is to be
consolidated, the cash and cash equivalents of the
subsidiary will be “netted” against the cash
disbursement to acquire the investment
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
9
Consolidated Cash Flows
• What special disclosures are required regarding
the acquisition of an intercorporate investment?
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
10
Consolidated Cash Flows
• What special disclosures are required regarding
the acquisition of an intercorporate investment?
– Among other things, these items must be disclosed:
• the cost of the purchase and the type and value
of consideration paid
• condensed balance sheet disclosing the amount
assigned to each major class of asset and liability
of the acquired enterprise at the date of
acquisition
• Typical disclosure is shown on the next 2 slides
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
11
Consolidated Cash Flows
• The cash used to acquire businesses during the
year is shown net of the cash received as a
result of the intercorporate investment
• Net cash flow effect of dispositions is also shown
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
12
Consolidated Cash Flows
• The cash flow effect should be readily discernable
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
13
Consolidated Cash Flows
• What non cash items of revenue and expense
lead to adjustments in the computation of
consolidated cash flow from operations?
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
14
Consolidated Cash Flows
• What non cash items of revenue and expense
lead to adjustments in the computation of
consolidated cash flow from operations?
– Numerous non-cash items are determinants of
consolidated income
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
15
Consolidated Cash Flows
• What non cash items of revenue and expense
lead to adjustments in the computation of
consolidated cash flow from operations?
– Numerous non-cash items are determinants of
consolidated income
– These non cash items requiring adjustment to
compute cash flow from operations include
• amortization of the purchase price discrepancy
• allocation to non-controlling interest in the
income statement
• other items where the income effect differs from
the cash flow amount - e.g. equity in earnings
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
16
Consolidated Cash Flows
• This represents typical annual report
disclosure of operating cash flow effects
associated with intercorporate investments
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
17
Consolidated Cash Flows
• What are the effects of dividends paid by
subsidiaries?
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
18
Consolidated Cash Flows
• What are the effects of dividends paid by
subsidiaries?
– When the subsidiary pays a dividend to the parent,
there is no change in the cash balance of the
company and no disclosure is warranted
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
19
Consolidated Cash Flows
• What are the effects of dividends paid by
subsidiaries?
– When the subsidiary pays a dividend to the parent,
there is no change in the cash balance of the
company and no disclosure is warranted
– When the subsidiary pays dividends to the external
(non-controlling) shareholders, these dividends
result in a cash outflow which is not otherwise
reported in the consolidated statements
• Dividends paid by subsidiaries to non-controlling
interests must be presented separately in the
cash flow statement as cash flows used in
financing activities
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
20
Changes in Ownership Interests
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
21
Changes in Ownership Interests
• Few inter-corporate investments consist of a
single purchase held into perpetuity
• Acquisitions are made as opportunities arise
and are sold as strategies change
• A systematic way of accounting for diverse
acquisitions is needed
• Further, a systematic way of accounting for
disposals is required, in order that a gain or
loss may be computed
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
22
Step acquisitions
• Most share acquisitions are made not as a
single purchase, but in “layers”
• The key to the accounting treatment is that the
layers must be tracked separately, to the extent
that there are purchase discrepancies arising
with each layer, and for the computation of
consolidated retained earnings
• For working papers and other supporting
calculations, a columnar format is often the
best approach
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
23
Step acquisitions
Some step acquisitions are fully planned and scheduled
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
24
Step acquisitions
• The “layers” are tracked separately
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
25
Step acquisitions
Whether an acquisition of a first small step, the
consummation of control from significant
influence, or the final stage of a 100%
acquisition, step acquisitions are the norm.
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
26
Disposals of investments
• When an investment is sold, a gain or loss is
computed as the difference between the
proceeds received and the net book value of
the investment
• The net book value of a portfolio investment
is the original cost
• The net book value of an affiliate or a
subsidiary is the book value computed under
the equity method
• Purchase discrepancy is adjusted to
remove investments sold (proportionately)
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
27
Disposals of investments
• Disposals of subsidiaries are generally
accounted for as discontinued operations
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
28
Disposals of investments
• The earnings and earnings per share effect of
discontinued operations is presented on the
face of the income statement
• The cash flow effect is also shown separately
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
29
Issue of shares by subsidiary
• Issue of shares by a subsidiary is always
accounted for as a partial disposal of the
investment, as the percentage owned changes
• When the subsidiary issues shares, the interest
of the parent is diluted
• Accordingly, when shares are issued, a gain or
loss is computed by computing the difference
between the proceeds received and the net
book value of the “reduction”
• The net book value is computed under the
equity method
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
30
Issue of shares by subsidiary
• When the net book value is computed under
the equity method, the investment account is
updated for all earnings since acquisition and
all dividends paid (i.e. for the change in the
subsidiary retained earnings), for amortization
of the purchase price discrepancy, and for
elimination of unrealized intercompany profits
• This “up to date” book value is used in all
calculations necessary to determine the gain
or loss on the issuance of shares by the
subsidiary
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
31
The Investment Account
Investment in Subsidiary
Original Cost
Income earned
Dividends received
P.D. Amortization
Unrealized gains, net
Balance
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
32
Issue of shares by subsidiary
• In this case, the subsidiary issued shares to the public,
diluting ownership by the parent
• The gain is computed by comparing the parent’s share of
proceeds received to the parent’s share of the subsidiary,
based on the balance in the investment account
• This non-cash, non-taxable gain increases the carrying
value of the investment
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
33
Issue of shares by subsidiary
• In this case, the Subsidiary (Loblaw) issued common
shares in order to consummate the acquisition of a further
subsidiary (Provigo) - the gain is recognized pursuant to
the issuance of shares and resulting ownership change
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
34
Subsidiary Preferred Shares
• Corporations often have complex capital
structures, with many categories of shares
• When there are preferred shares in the
capital structure of the subsidiary, total
shareholders’ equity of the subsidiary must be
allocated among the interests of the various
classes of shares on the basis of the
applicable rights and preferences
– Preferred shares owned by external shareholders
are presented as part of non-controlling interest
– All shares owned by the parent are eliminated
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
35
International View
• In many jurisdictions, detailed requirements
of accounting standards does not approach
that of Canada, so (although treatments of
these complex issues may be similar to that
of Canada) there is likely to be wide diversity
in practice and significant differences in
disclosure will be found
• In some countries, and especially for large
listed companies, however, the details of the
disclosure to be found may exceed that found
in Canadian financial statements
Chapter 9
© 2003 McGraw-Hill Ryerson Limited
36