Chapter 23

• Overview
Introduction to • Definitions
• Associates
consolidated financial
statements
 Learning outcomes
1. Define and describe some extremely important terms in the context of group
accounting: Parent, Subsidiary, Control, Consolidated financial statements;
Trade/simple investment
2. Identify subsidiaries within a group structure.
3. Define and identify an associate and significant influence.
4. Describe the key features of a parent-associate relationship; Identify an associate
within a group structure.
5. Describe the principle of equity accounting.
1. Overview
Consolidation means presenting the results, assets and liabilities
of a group of companies as if they were one company.

A group of inter-related companies

80% 60%
Parent Co.

Subsidiary Subsidiary
Co.1 Co.2
20%

Subsidiary 70% 20% Associate

Co. 3 Co.
 Overview
Basic principles
• Consolidation means adding together.
• Consolidation means cancellation of like items internal to the group.
• Consolidate as if you owned everything then show the extent to which you do not own
everything.
 Principle 1: Adding together
• Add parent and subsidiary's assets and liabilities line by line.
Example 1: P.Co owns 100% of S.Co.
1. P.Co has NCA of $80,000 and S.Co has NCA of $50,000. Consolidated NCA = ?
2. P.Co has bank loan of $100,000 and S.Co’s bank loan is $80,000. Consolidated bank
loan = ?
3. P.Co has receivables of $60,000 and S.Co has receivables of $40,000. S.Co owes P.Co
$10,000. What are consolidated receivables?
 Principle 2: Cancellation of like items
Answer Eg 1.3: Consolidated Receivable
• P.Co: 60,000
Less: intra-group receivable (10,000)
50,000
S.Co 40,000
Consolidated 90,000
• Cancellation of like items: Cancelling out items which appear as an asset in one
company and a liability or equity in another
• ‘Investment in subsidiary companies' in the parent company's accounts with ‘Share
capital' in the subsidiaries' accounts.
• Intra-group trading within the group.

Example 2: P.Co has payables of $50,000 and S.Co has payables of $45,000. We already
know that $5,000 of S's payables is a balance owed to P. What are consolidated
payable?
 Example 3: Cancellation
• Parent Co has just bought 100% of the shares of Subsidiary Co. Below are the
statements of financial position of both companies just before consolidation.
Parent Company Subsidiary Company
STATEMENT OF FINANCIAL POSITION STATEMENT OF FINANCIAL
POSITION
$’000 $’000
Assets Assets
Investment in subsidiary 50 Receivable 20
Receivable 30 Cash 30
80 50
Equity and Liabilities Equity and Liabilities
Share capital 80 Share capital 50
80 50

Cancelling item
 Consolidated SOFP
Group
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
$’000
Assets
Consolidated Receivable 50
account (Adding
together) Cash 30
80
Equity and Liabilities
Share capital of
Share capital 80
Parent Co only!
80
 Example 4
• Pegasus acquired 100% of the share capital of Sylvester on 1 January 20X1 for
$1,300,000 in cash. The SOFP of Pegasus and Sylvester as at 1 January 20X1 are set out
as follows: Pegasus Sylvester Pegasus Sylvester
$'000 $'000 $'000 $'000
ASSETS EQUITY AND LIABILITIES
Non-current assets Equity
Property, plant and 20,000 900 Share capital 5,000 1,300
equipment Retained earnings 19,450 0
Investment in Sylvester 1,300 24,450 1,300
21,300 Current liabilities
Current assets Trade payables 2,500 260
Inventories 3,200 400 Pegasus Co - 200
Trade receivables 2,500 175
Other 2,500 60
Sylvester Co 200 -
Other 2,300 175 Income tax payable 550 40
Cash 500 125 3,050 300
6,200 700 27,500 1,600
27,500 1,600
Required
Prepare the consolidated statement of financial position of the Pegasus Group as at 1 January 20X1.
 Principle 3: Consolidate as if you owned everything then show the extent to
which you do not own everything.

Example 5: P.Co owns 60% of S.Co. P.Co has NCA of $80,000 and S.Co has NCA of $50,000.
What are the consolidated NCA?
- Consolidate as if you owed everything
- Show the extend to which assets controlled by the group are owned by other parties:
Non-controlling interest (NCI) --> Show in the equity section of C.SOFP.
 2. Types of investment
2.1. Investment in Subsidiary
Definitions under IFRS 10 Consolidated financial statements
• Control: An investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee.
• Subsidiary: An entity that is controlled by another entity (known as the parent).
• Parent: An entity that controls one or more entities.
• Group: A parent and all its subsidiaries.
• Non-controlling interest: The equity in a subsidiary not attributable, directly or
indirectly to a parent.
• Control is presumed to exist when the parent owns > 50% of the voting power (eg
voting equity shares) unless in exceptional circumstances.
• Some exceptional circumstances:
Even when parent owns <= 50%, control still exists if parent has power to:
• Govern the financial and operating policies of the entity by statute or an agreement
• Appoint or remove a majority of members of the board of directors
• Cast a majority of votes at meetings of the board of directors
• Has power over 50% of voting rights by agreement with other investors
 Subsidiary in Consolidated FS
.
• IFRS 10 requires a parent to present consolidated FS in which the accounts of the
parent and subsidiaries are combined and presented as a single entity.
• A parent which issues consolidated financial statements should consolidate all
subsidiaries, both foreign and domestic.
 Lecture example 6
• J has a 40% shareholding in each of the following three companies:
• K: J has the power to govern the financial and operating policies of K.
• L: J has significant influence over the affairs of L.
• M: J has the right to appoint or remove a majority of the directors of M.
Required
Which of these companies are subsidiaries of J for financial reporting purposes?
A None of them
B K, L and M
C K and L only
D K and M only
 2.2. Associates
• Associate: An entity (including an unincorporated entity such as a partnership) in which
an investor has significant influence.
• Significant influence:
• The power to participate in, but not to control the financial and operating policy decisions of the
investee
• Assumed if hold > 20% of voting rights
• The existence of significant influence:
• Representation on the board of directors (or equivalent) of the investee
• Participation in the policy making process
• Material transactions between investor and investee
• Interchange of management personnel
• Provision of essential technical information
 Associates in Consolidated FS
Associates are accounted for in consolidated accounts using the equity method.
The equity method:
1. C.SOPL:
The investor should take account of its share of the earnings of the associate, whether or
not the investee distributes the earnings as dividends
SOPL
Group’s share of Associate’s Profit for the year X
(Show before group profit before tax)
 The equity method
2. C.SOFP
Investment in associates is stated at cost at the time of the acquisition. It will increase
(or decrease) each year by the amount of the group's share of investee’s increase (or
decrease) in post-acquisition retained reserves
SOFP
Investment in associate: (Include in NCA)
Cost of investment X
Share of A’s profit for the year X
Less: Dividend received (X)
Investment in associate X
3. No consolidated accounts
 Lecture example 7
• P Co acquires 25,000 of the 100,000 $1 ordinary shares in A Co for $60,000 on 1
January 20X8. In the year to 31 December 20X8, A Co earns profits after tax of
$24,000, from which it pays a dividend of $6,000. How will A Co's results be accounted
for in the consolidated accounts of P Co for the year ended 31 December 20X8?
 Lecture example 8
Which of the following statements regarding associates is true?
(1) Associates are consolidated in the group financial
statements.
(2) An associate is an entity in which the parent has
control.
(3) Associates are equity accounted in the group financial
statements.
(4) An associate is an entity in which the parent has
significant influence.
A (1) and (4)
B (1) and (2)
C (3) and (4)
D (2) and (3)
 Trade/Simple investment
• An investment in the shares of another entity, that is held for the accretion of wealth,
and is not an associate or a subsidiary.
• Summary of investment

Types of investment Influence Accounting Treatment

Subsidiary Control (> 50%) Consolidation

Associate Significant influence (20%+) Equity Method

Trade Investment Asset held for accretion of Usually at cost

wealth
 Lecture example 9
Identify the type of the following investments and required accounting method in the
consolidated financial statements of Smith Co?
• A: Smith Co owns 15% of the ordinary shares of Red Co and has significant influence
over Red Co.
• B: Smith Co owns 45% of the ordinary shares of Pink Co and can appoint 4 out of 5
directors to the board of directors of Pink Co.
• C: Smith Co owns 40% of the preference shares (non-voting) and 15% of the ordinary
shares of Yellow Co.
• D: Smith Co owns 60% of the preference shares (non-voting) and 40% of the ordinary
shares of Aquamarine Co.
 Investment in Parent’s FS
• All types of investment are initially recognized at cost in Parent’s FS.
• From then on, the investment can be:
• Carried at cost (recognized dividend income in the Income Statement)
• Or Accounted for as an available-for-sale financial asset
 Tackling the exam
Exam focus point:

All the definitions relating to group accounts are extremely important. You must learn
them and understand their meaning and application. The examiner has stated that
students need to be able to identify the nature of an investment, using the definitions of
control and significant influence. So questions in your exam may require you to apply
these definitions to scenarios.
You need to ensure that you attempt the questions on this topic, including the long
questions, in the Practice & Revision Kit for FFA/F3.
 Chapter summary
1 Concept
 Consolidated accounts are prepared for a group of
inter-related companies.
2 Types of investment: 3 types
—Subsidiaries (where there is control)
—Associates (where there is significant influence)
—Trade investments (no influence)
3 Parent's separate financial statements
 An investment in a subsidiary, associate or financial asset is shown in the
parent's SOFP at cost (for exam purposes).
 Dividends are show as investment income in the SOPL&OCI
4 Consolidated financial statements
 Issued to the shareholders of the parent only, in addition to the parent's own
financial statements.
 Show the group as a single business entity.
Chapter summary
5 Consolidated SOFP
 Add parent and subsidiary's assets and liabilities line by line. Show parent's
share capital and share premium only.
 The investment cancels with the share capital and pre-acquisition reserves of
the subsidiary.
 Consolidated reserves comprise the parent's reserves plus the group share of
the subsidiary's post acquisition reserves.
6 Accounting for associates
 Associates should be equity accounted in the consolidated financial
statements.
 Consolidated statement of financial position:
 Investment in associate (cost + share of post acquisition reserves – impairment)
 Consolidated statement of profit or loss:
 Share of associate's profit for the year

END OF CHAPTER 23