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    Chapter 24 - The Consolidated Statement of Balance

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    Nazrin Hasanzadeh
    Basic consolidation involves cancelling out intra-group items that appear as assets and liabilities, and adding together uncancelled assets and liabilities line by line. Goodwill arises when the cost of an acquisition exceeds the fair value of identifiable net assets, representing the value of intangible assets. Non-controlling interests are shown separately in equity at fair value plus their share of post-acquisition profits and other reserves. Intra-group profits are eliminated through an adjustment to inventory to avoid including internal profits in consolidated retained earnings. When a subsidiary is acquired during a year, pre- and post-acquisition profits must be distinguished to properly calculate goodwill and consolidated retained earnings.

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    Chapter 24 - The Consolidated Statement of Balance

    Uploaded by

    Nazrin Hasanzadeh
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    Basic consolidation involves cancelling out intra-group items that appear as assets and liabilities, and adding together uncancelled assets and liabilities line by line. Goodwill arises when the cost of an acquisition exceeds the fair value of identifiable net assets, representing the value of intangible assets. Non-controlling interests are shown separately in equity at fair value plus their share of post-acquisition profits and other reserves. Intra-group profits are eliminated through an adjustment to inventory to avoid including internal profits in consolidated retained earnings. When a subsidiary is acquired during a year, pre- and post-acquisition profits must be distinguished to properly calculate goodwill and consolidated retained earnings.

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    Chapter 24 - The consolidated statement of Balance

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    Basic consolidation involves cancelling out intra-group items that appear as assets and liabilities, and adding together uncancelled assets and liabilities line by line. Goodwill arises when the cost of an acquisition exceeds the fair value of identifiable net assets, representing the value of intangible assets. Non-controlling interests are shown separately in equity at fair value plus their share of post-acquisition profits and other reserves. Intra-group profits are eliminated through an adjustment to inventory to avoid including internal profits in consolidated retained earnings. When a subsidiary is acquired during a year, pre- and post-acquisition profits must be distinguished to properly calculate goodwill and consolidated retained earnings.

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    54 views3 pages

    Chapter 24 - The Consolidated Statement of Balance

    Uploaded by

    Nazrin Hasanzadeh
    Basic consolidation involves cancelling out intra-group items that appear as assets and liabilities, and adding together uncancelled assets and liabilities line by line. Goodwill arises when the cost of an acquisition exceeds the fair value of identifiable net assets, representing the value of intangible assets. Non-controlling interests are shown separately in equity at fair value plus their share of post-acquisition profits and other reserves. Intra-group profits are eliminated through an adjustment to inventory to avoid including internal profits in consolidated retained earnings. When a subsidiary is acquired during a year, pre- and post-acquisition profits must be distinguished to properly calculate goodwill and consolidated retained earnings.

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    Study Guide

    Preparing simple consolidated financial statements


    Subsidiaries

    Describe the components of and prepare a consolidated statement of financial position or extracts thereof, including:
    1. Fair value adjustments at acquisition on land and buildings (excluding depreciation adjustments)
    2. Fair value of consideration transferred from cash and shares (excluding deferred and contingent consideration)
    3. Elimination of intra-group trading balances (excluding cash and goods in transit)
    4. Removal of unrealised profit arising on intra-group trading
    5. Acquisition of subsidiaries part way through the financial year

    Goodwill is the excess of consideration paid plus fair value of non-controlling interest over fair value of net assets
    acquired.
    Calculate goodwill (excluding impairment of goodwill) using the full goodwill method only as follows:
    Fair value of consideration X
    Fair value of non-controlling interest X
    Less fair value of net assets at acquisition (X)
    Goodwill at acquisition X

    Summary of consolidation procedures

    Basic consolidation consists of two procedures.


     Cancelling out items which appear as an asset in one company and a liability in another
     Then adding together all the uncancelled assets and liabilities on a line by line basis

    The asset 'investment in subsidiaries' in the parent company accounts always cancels with the share capital of the subsidiary companies.
    The only share capital in the consolidated accounts is that of the parent company.

    When the directors of P Co agree to pay $60,000 for a 100% investment in S Co they must believe that, in addition to its non-current assets
    of $40,000, S Co must also have intangible assets worth $20,000. This amount of $20,000 paid over and above the value of the tangible
    assets acquired is called the goodwill arising on consolidation (or sometimes premium on acquisition).

    This $20,000 would appear in the consolidated statement of financial position under the caption 'Intangible non-current assets: goodwill
    arising on consolidation'.

    If P Co now purchases all the shares in S Co it will acquire total assets worth $48,000 at a cost of $60,000. Clearly in this case S Co's
    intangible assets (goodwill) are being valued at $12,000. It should be apparent that any earnings retained by the subsidiary prior to its
    acquisition by the parent company must be incorporated in the cancellation process so as to arrive at a figure for goodwill arising on
    consolidation. In other words, not only S Co's share capital but also its pre-acquisition retained earnings must be cancelled against the
    asset 'investment in S Co' in the accounts of the parent company. The uncancelled balance of $12,000 appears in the consolidated statement
    of financial position.
    The consequence of this is that any pre-acquisition retained earnings of a subsidiary company are not aggregated with the parent
    company's retained earnings in the consolidated statement of financial position.

    The figure of consolidated retained earnings comprises the retained earnings of the parent company plus the post-acquisition retained
    earnings only of subsidiary companies. The post-acquisition retained earnings are simply retained earnings now less retained earnings
    at acquisition.

    Other reserves, such as the revaluation surplus, are treated in the same way as retained earnings.

    Only the profits earned by the group should be consolidated. Profits earned by the subsidiary before it became part of the group are not
    group profits.
    Fair value of net assets at acquisition
    The land and buildings of the subsidiary may be worth more than their carrying amount at acquisition. If this is the case, it must be taken
    into account in the consolidated financial statements, as follows.
    (a) The subsidiary's land and buildings must be included in the consolidated statement of financial position at their fair value.
    (b) The difference between the fair value of the subsidiary's land and buildings and the carrying value of those land and buildings must be
    taken into account in the goodwill calculation. This is known as a fair value adjustment.

    The proforma for goodwill will now look as follows.


    Goodwill $ $
    Consideration transferred X
    Less net acquisition-date fair value of identifiable assets acquired
    and liabilities assumed:
    Ordinary share capital X
    Share premium X
    Retained earnings at acquisition X
    Fair value adjustments at acquisition X
    (X)
    Goodwill X
    [

    EXAM FOCUS POINT


    If there is a difference between the carrying amount and the fair value of a subsidiary's land and buildings in an exam question,
    you will be given the fair value.
    In calculating goodwill, some students incorrectly used the fair value of net assets at the year-end date instead of at the
    acquisition date.

    IMPORTANT
    The calculation of goodwill must be based on the fair value of the consideration transferred. For cash, this is straightforward; it
    is simply the amount of cash paid. But what about shares? The fair value of shares is their market price on the date of
    acquisition.

    Non-controlling interests
    IFRS 10 defines non-controlling interest as the equity in a subsidiary not attributable, directly or indirectly, to a parent.
    NCI is shown in the equity section of the consolidated statement of financial position and is included in the consolidated financial
    statements at its fair value plus the NCI's share of post-acquisition retained earnings and other reserves.
    Non-controlling interest $
    Fair value of NCI at acquisition X
    Plus NCI's share of post-acquisition retained earnings (and other reserves) X
    NCI at reporting date X

    Goodwill and NCIs


    Where there is a NCI, the consolidated accounts show 100% of goodwill even though the group does not 'own' all of it.
    The proforma for goodwill will now look as follows.
    Goodwill $ $
    Fair value of consideration transferred X
    Plus fair value of NCI at acquisition X
    Less net acquisition-date fair value of identifiable assets acquired and
    liabilities assumed:
    Ordinary share capital X
    Share premium X
    Retained earnings at acquisition X
    Fair value adjustments at acquisition X
    (X)
    Goodwill X

    Total goodwill is recognised in the statement of financial position, as the group controls 100% of it.
    Intra-group trading
    A consolidation adjustment is required to remove unrealised profit on intra-group trading.

    The objective of consolidated accounts is to present the financial position of several connected companies as that of a single entity, the
    group. This means that in a consolidated statement of financial position the only profits recognised should be those earned by the
    group in providing goods or services for outsiders. Similarly, inventory in the consolidated statement of financial position should be valued
    at cost to the group.
    We call this the 'provision for unrealised profit' or PUP, as it is a provision against inventory for the unrealised profit generated by the
    intra-group sale.

    Acquisition of a subsidiary part way through the year


    When a parent acquires a subsidiary part way through the year, the profits for the period need to be apportioned between pre- and post-
    acquisition. Only post-acquisition profits are included in the group's consolidated statement of financial position.

    The subsidiary's accounts to be consolidated will show the subsidiary's profit or loss for the whole year.

    For consolidation purposes, however, it will be necessary to distinguish between:


    (a) Profits earned before acquisition – so that we can calculate goodwill
    (b) Profits earned after acquisition – so that we can calculate group retained earnings

    To do this, we usually assume that the subsidiary's profits accrue evenly over the year. Then we can take the profit for the year and
    calculate the pre- and post-acquisition profits based on the number of months the parent has owned the subsidiary.

    EXAM FOCUS POINT


     Give the statement its correct title ie 'Consolidated statement of financial position at (year-end date)'
     The investment in the subsidiary is replaced with a goodwill figure.
     Share capital and share premium balances are not added together; only the balances related to the parent are used in the consolidation.
     If there is intra-group trading then adjust the receivables and payables that cancel each other out.
     Any dividends paid by the subsidiary to the parent should be adjusted, as the net effect to the group is zero.
     Adjust for any unrealised profits on sales of inventory between the parent and the subsidiary.

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