BAYERO UNIVERSITY, KANO

FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT OF ACCOUNTING
ACC 4301: Advanced Accounting and Theory I
2020/2021 Session
Adjustments for Consolidated Financial Statements (Basic)
Consolidated financial statements are financial statements of a group (i.e.
parent and its subsidiaries) presented like those of a single economic entity. The method used in
preparing and presenting consolidated financial statements involves merging the separate
financial statements of parent company and its subsidiaries. Hence, solving questions on
consolidated financial statements involves the following two major steps:
i. Making necessary adjustments to the financial statements of the two distinct legal
entities. This include adjusting various accounting treatments applied in preparing the
two separate reports;
ii. Merging the adjusted figures arrived at in (i) above.
Adjustments for Consolidated statement of financial position
The main workings involved while preparing consolidated statement of financial position include
adjustments regarding goodwill, retained earnings and non-controlling interest. Aside from
these, it is imperative to note the following:
i. The cost of investment in the subsidiary which stands for asset in the parent’s statement
of financial position is not shown in the consolidated statement;
ii. Consolidated assets and liabilities are determined by summing up the balances of the
respective assets and liabilities from the financial position of the parent and the
subsidiary;
iii. The share capital and share premium of the subsidiary usually vanish in the
consolidation process, what is reflected in the consolidated statement is merely that of the
parent company.
Illustration One
X was first incorporated as a company on 31 st December, 2012. On that day, Z Plc acquired
100% of its voting shares at the cost of ₦216,000. On the same date also, the net asset of the X
was valued at the exact cost Z Plc acquired the company. The financial positions of the two
companies as at the date of acquisition are as follows:

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 Z X
1,152,00
Property, plant and equipment 0 225,000
Investment in X 216,000
Current assets 252,000 36,000
1,620,00
0 261,000

Share capital 360,000 144,000

Share premium 450,000 72,000
Retained earnings 630,000
1,440,00
0 216,000
Current liabilities 180,000 45,000
1,620,00
0 261,000
You are required to prepare consolidated statement of financial position as at the date of
acquisition of X limited.

1. Adjustments for Retained Earnings

Retained earnings are in other words called accumulated or unappropriated profit i.e. remaining
profit belonging to equity shareholders, but which is yet to be distributed to them as dividend.
Adjustments for retained earnings in the consolidation process arise due the fact that the date of
incorporation of the subsidiary and the date on which it is acquired by a parent company tend to
be different. The subsidiary may have been operating and accumulating profit for long before the
parent company gains control of its voting shares. This necessitate the need for determining the
profit accumulated by the subsidiary to the date of its acquisition (i.e. pre-acquisition profit) and
subsequent profit retained from the date of acquisition to the end of accounting period (i.e. post-
acquisition profit). Where a subsidiary has other reserves than retained earnings, same rules
apply. Therefore, in consolidating the retained earnings of a subsidiary company with that of a
parent, only the share of the parent company in the subsidiary’s post-acquisition profit is taken
into account. That is to say, pre-acquisition profit of the subsidiary doesn’t form part of the
retained earnings in the consolidated financial statements. Hence, consolidated retained profit
can be determined as follows:

Entire parent company's retained profit XX

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Add: parent company' s Share of post-acquisition profit of the subsidiary XX
XX
Consolidated retained profits X
Illustration Two
On 1st January 2013, M acquired 100% of equity share capital of N for ₦360,000. On that day
the balance in the retained earnings account stood at ₦144,000. Below are statements of financial
positions of the two companies as at 31st December, 2013.
M N
₦ ₦
1,224,00
Property, plant and equipment 0 441,000
Investment in N 360,000
Current assets 315,000 162,000
1,899,00
0 603,000

Share capital 270,000 54,000

Share premium 504,000 162,000
Retained earnings 846,000 252,000
1,620,00
0 468,000
Current liabilities 279,000 135,000
1,899,00
0 603,000

You are required to prepare consolidated statement of financial position as at 31st December,
2013
2. Adjustments for Goodwill
Goodwill is an intangible asset that arises when one company purchases another for a premium
value. It is as an asset standing for future economic benefits stemming from assets acquired in a
business combination that are not individually identified and separately recognised. Goodwill is
considered an intangible asset because it is not a physical asset like buildings or equipment. The
value of a company’s brand name, solid customer base, good customer relations, good employee
relations, and any patents or proprietary technology represent goodwill. Goodwill is created
when one company acquires another for a price higher than the fair market value of its assets. In
other words, it arises where the cost of investment exceeds the net assets of the subsidiary. This
is because, when a parent company purchases a subsidiary, the consideration it pays is expected

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to be more than the value of the subsidiary’s assets; because, the parent is presumed to buy the
possibility of the subsidiary to make profit. Goodwill is tested annually for impairment and is
treated as an asset in the consolidated statement of financial position. It is determined in line with
IFRS 3 as follows:
₦
Consideration transferred (cost of the business
combination) XX
Non-controlling interest XX

The net of the acquisition date amounts of identifiable

assets acquired and liabilities assumed (measured in
accordance with IFRS 3) XX
Goodwill recognized XX

Illustration Three
The retained earnings of B on 1st January, 2014 was ₦190,000. On that date, A acquired 100% of
B voting shares for ₦437,000. The financial positions the two firms as at 31 st December, 2014
were as follow:
A B
Assets:
Investment in B 437,000
1,083,00
Sundry assets 0 456,000
1,520,00
0 456,000

Equity:
Share capital 380,000 95,000
Share premium 190,000 38,000
Retained Earnings 836,000 237,500
1,406,00
0 370,500
Liabilities 114,000 85,500
1,520,00
0 456,000

You are required to prepare consolidated statement of financial positions as at 31st December,
2014.
Illustration Four

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You are required to determine the goodwill stemming from the acquisition in cases below,
assuming that the non-controlling interest at acquisition is a proportionate share of the net assets
of the subsidiary.

i. M acquired 90% of N limited some years back for ₦3,062,500. On that date the share
capital of N was ₦1,750,000. Share premium, revaluation reserve and retained earnings
stood at ₦84,000, ₦210,000 and ₦437,500 respectively.
ii. On 1st January 2006, the net assets of Y limited was ₦1,320,000. X acquired 60% thereof
on the same date for ₦1,263,900.
iii. A Ltd acquired 55% of B Limited several years ago for ₦1,950,000. On that date B
limited had share capital of ₦975,000 and retained earnings of ₦1,462,500.
iv. Q Ltd bought 40% of R some years ago for ₦155,00. R Ltd had share capital and retained
earnings of ₦775,000 and 1,162,500 respectively. The 40% ownership of R enables Q
Ltd to exercise de facto control over R.

3. Adjustments for Non-controlling Interest

Non-controlling interest (NCI) is defined in IFRS 10 as the equity in a subsidiary that is not
attributable to a parent company. It arises where a parent company buys less than 100% equity
shares of the subsidiary. Where a parent company holds less than 100% (e.g. 55%) voting shares,
the remaining 45% will be owned by other shareholders. This constitutes the non-controlling
interest in the subsidiary. For the purpose of consolidated financial statements, NCI is recognized
in equity in order to indicate their ownership interest in the net assets of the subsidiary. Because,
some portion of the consolidated net assets of the subsidiary belongs to the NCI. As at reporting
date, NCI is computed as follows:

NCI at the date of acquisition XX

NCI’s share of the post-acquisition retained earnings of
subsidiary XX
NCI’s share of each other post-acquisition reserves of
subsidiary (if any) XX
NCI’s share of net assets at the date of consolidation XX

At the date of acquisition, NCI is determined in two different ways:

i. As a percentage of the net assets of the subsidiary at the date of acquisition;

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 ii. At fair value as at the date of acquisition

Illustration Five
E Ltd bought 80% of F on 1 st January 2009 for ₦402,500 when the retained earnings of F stood
at ₦175,000. The financial statements of the two companies on 31st December, 2009 were as
follow:
E F
investment in F 402,500
other assets 997,500 420,000
1,400,00
0 420,000

share capital 350,000 87,500

share premium 175,000 35,000
retained earnings 770,000 218,750
1,295,00
0 341,250

Liabilities 105,000 78,750

1,400,00
0 420,000

It had been the policy of E to recognize NCI at the date of acquisition as a proportionate share of
net assets of any subsidiary acquired. The fair value of NCI at acquisition was ₦70,000.
You are required to prepare consolidated statement of financial position on 31 st December, 2009
taking into consideration the effects of two methods of determining NCI at the date of
acquisition.
Illustration Six
The statement of financial positions of AX and AY as at 31st December, 2011 are as follows:
Assets: AX AY
investment in AY 742,500
other assets 825,000 577,500
1,567,50
0 577,500
Equity
share capital 165,000 165,000

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 1,072,50
retained earnings 0 165,000
1,237,50
0 330,000

Current liabilities 330,000 247,500

1,567,50
0 577,500

AX acquired 70% of AY on 1st January 2011 for ₦742,500 The retained earnings of AY were
₦82,500 at that date. It is AX’s policy to recognise non-controlling interest at the date of
acquisition as a proportionate share of net assets.

You are required to prepare a consolidated statement of financial position as at 31 December

2011

Steps for Preparing Consolidated Statement of Financial Position

It can be observed based on the foregoing that the following seven steps are expected to be
followed while preparing consolidated statement of financial position
i. Ascertaining the group share, which include determining the parent company share in the
subsidiary and the percentage held by non-controlling interests;
ii. Effect the necessary double entry to record any individual firm adjustments that might be
necessary;
iii. Set out the outline/layout of statement of financial position;
iv. Determine the net assets of the subsidiary at the date of acquisition and reporting;
v. Determine the value of goodwill;
vi. Calculate the value of non-controlling interest;
vii. Determine the consolidated retained earnings.