ADVANCED FINANCIAL ACCOUNTING CONSOLIDATED PROFIT OR LOSS & OTHER INCOME

CONSOLIDATED STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME

Consolidation Procedure
The consolidated statement of profit or loss combines the financial statements of parent and subsidiary (subsidiaries) to
present the results for the accounting period as the results of a single economic unit.
It is customary in practice to prepare a working paper (known as a consolidation schedule) on which the individual
statements of profit or loss are set out side by side and totalled to form the basis of the consolidated statement of profit or
loss.
The following table shows the major items in the consolidated statement of profit or loss and how they are adjusted

ITEM ADJUSTMENT
Sales Revenue Add P Co + S Co (100%) (excluding adjustments for intra-group
transactions)
Cost of Sales Add P Co + S Co (100%) (excluding adjustments for intra-group
transactions)
Expenses Add P Co + S Co (100%) (excluding adjustments for intra-group
transactions)
Unrealised Profit In Inventory (a) Goods sold by P. Increase cost of sales by unrealised profit
(b) Goods sold by S. Increase cost of sales by full amount of unrealised profit and
decrease non-controlling interest by their share of unrealised profit
Depreciation If the value of S's non-current assets have been subjected to a fair value uplift,
then any additional depreciation must be charged to profit or loss. The non-
controlling interest will need to be adjusted for their share.
Transfer of Non Current Assets Adjust the profits of the selling company and reduce the additional depreciation
charged by the buying company
NCI in the S Co Profit for the year S's profit after tax (PAT) 100
Less: *unrealised profit (5)
*profit on disposal of non-current assets (3)
additional depreciation following FV increase (10)
Add: **additional depreciation on disposal of NCA 12
Adjusted S's profit after tax (PAT) 70
NCI 20% x 70 14
*Only applicable if sales of goods and non-current assets made by subsidiary.
**Only applicable if sale of non-current assets (NCA) made by subsidiary.

INTRA GROUP SALES OF NON-CURRENT ASSETS

In their individual accounts the companies concerned will treat the transfer just like a sale between unconnected parties:
the selling company will record a profit or loss on sale, while the purchasing company will record the asset at the amount
paid to acquire it, and will use that amount as the basis for calculating depreciation.
On consolidation, the usual 'group entity' principle applies. The consolidated statement of financial position must show
assets at their cost to the group, and any depreciation charged must be based on that cost. Two consolidation adjustments
will usually be needed to achieve this.
(a) An adjustment to alter retained earnings and non-current assets cost so as to remove any element of unrealised profit
or loss. This is similar to the adjustment required in respect of unrealised profit in inventory.
(b) An adjustment to alter retained earnings and accumulated depreciation is made so that consolidated depreciation is
based on the asset's cost to the group.
In practice, these steps are combined so that the retained earnings of the entity making the unrealized profit are debited
with the unrealised profit less the additional depreciation.

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ADVANCED FINANCIAL ACCOUNTING CONSOLIDATED PROFIT OR LOSS & OTHER INCOME

The double entry is as follows.

(a) Sale by parent
DEBIT Group retained earnings
CREDIT Non-current assets
with the profit on disposal, less the additional depreciation.

(b) Sale by subsidiary

DEBIT Group retained earnings (P's share of S)
DEBIT Non-controlling interest (NCI's share of S)
CREDIT Non-current assets
With the profit on disposal, less additional depreciation

Example: Intra-group sale of non-current assets

P Co owns 60% of S Co and on 1 January 2021 S Co sells plant costing $10,000 to P Co for $12,500. The companies make up
accounts to 31 December 2021 and the balances on their retained earnings at that date are:

P Co after charging depreciation of 10% on plant $27,000

S Co including profit on sale of plant $18,000

REQUIRED
Show the working for consolidated retained earnings.
Solution
Retained earnings
P Co S Co
$ $
Per question 27,000 18,000
Disposal of plant
Profit (2,500)
Depreciation: 10%  $2,500 250
15,750
Share of S Co: $15,750  60% 9,450
Group Profit 36,450

Notes
1 The NCI in the retained earnings of S Co is 40%  $15,750 = $6,300.
2 The profit on the transfer less related depreciation of $2,250 (2,500 – 250) will be deducted from
the carrying amount of the plant to write it down to cost to the group.

Example: Consolidated Statement of Profit or Loss

P Co acquired 75% of the ordinary shares of S Co on that company's incorporation in 2018. The summarised statements of
profit or loss and movement on retained earnings of the two companies for the year ending 31 December 2021 are set out
below.
P Co S Co
$ $
Sales revenue 75,000 38,000
Cost of sales ( (30,000) ( (20,000)
Gross profit 45,000 18,000
Administrative expenses ( (14,000) (8,000)
Profit before tax 31,000 10,000
Income tax expense ( (10,000) (2,000)
Profit for the year 21,000 8,000

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ADVANCED FINANCIAL ACCOUNTING CONSOLIDATED PROFIT OR LOSS & OTHER INCOME

Note: Movement on retained earnings

Retained earnings brought forward 87,000 17,000
Profit for the year 21,000 8,000
Retained earnings carried forward 108,000 25,000

REQUIRED
Prepare the consolidated statement of profit or loss and extract from the statement of changes in equity showing retained
earnings and non-controlling interest.

Solution

P CO CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2021
$
Sales revenue (75 + 38) 113,000
Cost of sales (30 + 20) (50,000)
Gross profit 63,000
Administrative expenses (14 + 8) (22,000)
Profit before tax 41,000
Income tax expense (12,000)
Profit for the year 29,000
Profit attributable to:
Owners of the parent 27,000
Non-controlling interest ($8,000  25%) 2,000
29,000

STATEMENT OF CHANGES IN EQUITY (EXTRACT)

Retained Non-controlling Total

earnings interest equity
$ $ $
Balance at 1 January 2021 99,750 4,250 104,000
Total comprehensive income for the year 27,000 2,000 29,000
Balance at 31 December 2021 126,750 6,250 133,000

NOTE
(a) Down to the line 'profit for the year',the whole of S Co's results is included without reference to group share or non-
controlling share. A one-line adjustment is then inserted to deduct the noncontrolling share of S Co's profit.
(b) The non-controlling share ($4,250) of S Co's retained earnings brought forward (17,000  25%) is excluded from group
retained earnings. This means that the carried forward figure of $126,750 is the figure which would appear in the statement
of financial position for group retained earnings.

EXAMPLE 2: EXAMPLE: INTRA-GROUP TRADING

Suppose in our earlier example that S Co had recorded sales of $5,000 to P Co during 2021. S Co had purchased these goods
from outside suppliers at a cost of $3,000. One half of the goods remained in P Co's inventory at 31 December 2021.

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ADVANCED FINANCIAL ACCOUNTING CONSOLIDATED PROFIT OR LOSS & OTHER INCOME

Consolidated Statement of Profit or Loss for the year ended 31 December 2021
$
Sales revenue (75 + 38 – 5) 108,000
Cost of sales (30 + 20 – 5 + 1*) (46,000)
Gross profit 62,000
Administrative expenses (22,000)
Profit before taxation 40,000
Income tax expense (12,000)
Unrealised profit: ½  ($5,000 – $3,000)
Profit for the year 28,000
= $1000
Profit attributable to :
Owners of the parent 26,250
Non-controlling interest (8,000 – 1,000) × 25% 1,750
28,000

Note
Retained earnings brought forward 99,750
Profit for the year 26,250
Retained earnings carried forward 126,000

EXERCISE
On 1 July 2021 Crystal acquired 60,000 of the 100,000 shares in Pebble, its only subsidiary. The draft statements of profit or
loss and other comprehensive income of both companies at 31 December 2021 are shown below:

Crystal Pebble
$'000 $'000
Revenue 43,000 26,000
Cost of sales (28,000) (18,000)
Gross profit 15,000 8,000
Other income – dividend received from Pebble 2,000 –
Distribution costs (2,000) (800)
Administrative expenses (4,000) (2,200)
Finance costs (500) (300)
Profit before tax 10,500 4,700
Income tax expense (1,400) (900)
Profit for the year 9,100 3,800
Other comprehensive income:
Gain on property revaluation – 2,000
Investment in equity instrument 200 –
Total comprehensive income for the year 9,300 5,800

Additional Information:
(i) At the date of acquisition, the fair values of Pebble's assets were equal to their carrying amounts with the exception of a
building which had a fair value $1m in excess of its carrying amount. At the date of acquisition, the building had a remaining
useful life of 20 years. Building depreciation is charged to administrative expenses. The building was revalued again at 31
December 2021 and its fair value had increased by an additional $1m.
(ii) Sales from Crystal to Pebble were $6m during the post-acquisition period. All of these goods are still held in inventory by
Pebble. Crystal marks up all sales by 20%.
(iii) Despite the property revaluation, Crystal has concluded that goodwill in Pebble has been impaired by $500,000.
(iv) It is Crystal's policy to value the non-controlling interest at full (fair) value.
(v) Income and expenses can be assumed to have arisen evenly throughout the year.

REQUIRED
A consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2021.

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ADVANCED FINANCIAL ACCOUNTING CONSOLIDATED PROFIT OR LOSS & OTHER INCOME

WORKINGS
DR Revenue $6m/CR Cost of sales $6m
1 Unrealised Profit Remove intercompany trading:
Unrealised profit = 6,000  20/120 = 1,000 – add to cost of
sales
2 Movement on fair value adjustment
The fair value adjustment of $1m will be depreciated over the remaining life of the building as follows
1,000,000 / 20  6/12 = 25,000 and 40% of this (10,000) will be charged to the NCI.

3 Non-controlling interest – share of profit for the year

$'000
Share of post-acquisition profit (3,800  6/12  40%) 760
Movement on fair value adjustment (25  40%) (10)
Share of goodwill impairment (500  40%) (200)
Adjusted NCI’s share of profit 550

CONSOLIDATED P/L & OTHER COMPREHENSIVE INCOME PARENT SUB ADJ TOTAL
$'000 $'000 $'000 $'000
Revenue 43000 13000 (6000) 50000
Cost of sales (28000) (9000) 6000
Unrealised Proifit in Inventory (1000) (32000)
Gross profit 18,000
Distribution costs (2000) (400) (2400)
Administrative expenses (4000) (1100) (500)
(25) (5625)
Finance costs (500) (150) (650)
Other Income: Dividends 2000
Profit before tax 10500 2350 9325
Income tax expense (1400) (450) (1850)
Profit for the year 9100 1900 7475
Other comprehensive income:
Gain on property revaluation(post-acquisition) 1000 1000
Investment in equity instrument 200 200
Total comprehensive income for the year 9300 2900 8675
Profit attributable to:
Owners of the parent 6925
Non-controlling interest 550
7475
Total comprehensive income attributable to:
Owners of the parent 7725
Non-controlling interest 950
8675