ACT 3113 Advanced Financial Accounting: Consolidated Accounts

ACT 3113
Advanced Financial Accounting

Consolidated Accounts
• LKAS 27 Separate Financial Statements
• LKAS 28 Investments in Associates
• SLFRS 3 Business Combinations
• SLFRS 10 Consolidated Financial Statements
• SLFRS 11 Joint Arrangements
Lectured By: Kithsiri Samarakoon
Department of Accountancy Page 1

Part I - INTRODUCTION AND BASICS
Introduction
A parent company prepares consolidated financial statements to include its subsidiaries.
Associates and joint ventures are accounted for using the equity method. Other
investments are financial assets accounted for under LKAS 39.
• LKAS 27 Separate Financial Statements

• LKAS 28 Investments in Associates
• SLFRS 3 Business Combinations
• SLFRS 10 Consolidated Financial Statements
• SLFRS 11 Joint Arrangements
These standards are all concerned with different aspects of group accounts, but there is some
overlap between them.
Definitions:
The following definitions are drawn from the standards listed above:
 Group is a parent and its subsidiaries. (SLFRS 10)

 Parent is an entity that controls one or more entities. (SLFRS 10)
 Subsidiary is an entity that is controlled by another entity. (SLFRS 10)
 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 power over the investee. (SLFRS 10)
 Power is existing rights that give the current ability to direct the relevant activities.
(SLFRS 10)
 Relevant activities are activities of the investee that significantly affect the investee’s
returns. (SLFRS 10)
 Associate is an entity over which an investor has significant influence that is neither a
subsidiary nor a joint venture. (LKAS 28)
 Significant influence is the power to participate in the financial and operating policy
decisions of an investee but is not control or joint control over those policies. (LKAS 28)
 Joint arrangement is an arrangement of which two or more parties have joint control.
(SLFRS 11, LKAS 28)
 Joint control is the contractually agreed sharing of control of an arrangement, which
exists only when decisions about the relevant activities require the unanimous consent
of the parties sharing control. (SLFRS 11, LKAS 28)

 Joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. (SLFRS 11, LKAS 28)
 Joint operation is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets and obligations for the liabilities relating to the
arrangement. (SLFRS 11)
Levels of investment
The treatment applied by an investor (parent company) to its investee is summarized in the
following table:
Investment Criteria Required treatment in group

accounts
Subsidiary Control Full consolidation
Associate Significant influence Equity accounting
Joint venture Joint control Equity accounting
Investment Asset held for accretion of wealth As a financial asset

/ dividend income
1. LKAS 27 Separate financial statements

LKAS 27 Separate Financial Statements provides accounting guidance to be applied in the
preparation of the parent’s single company financial statements.
Investments in subsidiaries, joint ventures and associates included in the consolidated
financial statements should be either:
1) accounted for at cost, or

2) in accordance with LKAS 39 /SLFRS 9 as a financial asset.
The same accounting must be applied to each category of investments.
Where an entity opts to measure investments at cost, these should be measured in
accordance with SLFRS 5 at such time as they become classified as held for sale.
Principles of consolidation
A subsidiary is an entity that is controlled by a parent company; unless the parent company
is an investment entity it must consolidate all subsidiaries
Identification of a subsidiary
As defined above, a subsidiary is an entity that is controlled by another entity. An investor
has control over an investee if and only if it has all of the following:
1) Power over the investee

2) Exposure to, or rights to, variable returns from its involvement with the investee;
and

3) The ability to use its power over the investee to affect the amount of the
investor’s returns
If there are changes to one or more of these three elements of control, then an investor
should reassess whether it controls an investee.
Preparation of consolidated financial statements

Consolidated financial statements are financial statements in which the assets, liabilities,
equity, income, expenses and cash flows of the parent and its subsidiaries are presented as
those of a single economic entity. When a parent issues consolidated financial statements, it
should consolidate all subsidiaries, both foreign and domestic.
Exemption from preparing consolidated financial statements

A parent need not present consolidated financial statements if and only if all of the
following hold:
(a) The parent is itself a wholly-owned subsidiary or it is a partially owned subsidiary of
another entity and its other owners, including those not otherwise entitled to vote,
have been informed about, and do not object to, the parent not presenting
consolidated financial statements
(b) Its securities are not publicly traded
(c) It is not in the process of issuing securities in public securities markets; and
(d) The ultimate or intermediate parent publishes consolidated financial statements that
comply with International Financial Reporting Standards
A parent that does not present consolidated financial statements must comply with the
LKAS 27 rules on separate financial statements.
Exclusion of a subsidiary from consolidation

An entity that is not an investment entity must consolidate all of the subsidiaries that it
controls. An entity may not be excluded from consolidation on the grounds of:
• Dissimilar activities (since more relevant information is provided where consolidated
financial statements include all subsidiaries and then additional information is provided
about different business activities)
• Severe long term restrictions (if the long term restrictions under which a subsidiary
operates do not result in a loss of control, then that subsidiary must be consolidated).
These rules are necessarily strict as historically the exclusion of subsidiaries from
consolidation has been a method used by groups to manipulate their results. Note that the
definition of a subsidiary is an ‘entity’ and this term includes unincorporated entities.
Therefore structuring a controlled business as a partnership does not result in its exclusion
from consolidation.
Investment Entities
An investment entity is an entity that:
(a) obtains funds from one or more investors for the purpose of providing those investor(s)
with investment management services;

(b) Commits to its investor(s) that its business purpose is to invest funds solely for returns
from capital appreciation, investment income or both; and
(c) Measures and evaluates the performance of substantially all of its investments on a fair
value basis. (SLFRS 10)
Investment entities include entities such as pension funds, venture capital organizations and
other investment funds.
These entities do not consolidate the results of the subsidiaries that they control as this does
not result in relevant or useful information. Instead investment entities are required to
measure their subsidiaries at fair value through profit or loss.
This requirement does not extend to the subsidiaries of an investment entity that provide
services relating to the investment entity’s activities. These subsidiaries are consolidated as
normal.
Mechanics of consolidation
SLFRS 10 makes the following points:
 If a subsidiary prepares its financial statements to a different reporting date from that
of the group it should prepare additional financial statements to the group reporting
date, or if that is not possible its most recent accounts may be used for consolidation
providing that:
(i) The gap between the reporting dates is three months or less, and
(ii) Adjustments are made for the effects of significant transactions or other
events that occur between the reporting dates.
 Uniform accounting policies should be applied in the consolidated financial

statements; where a group member uses different accounting policies, its financial
statements are adjusted for consolidation.
 The results of a subsidiary are included in the consolidated financial statements from
the date on which the investor obtains control of the investee.
 The results of a subsidiary cease to be included in the consolidated financial

statements on the date on which the investor loses control of the investee
2. SLFRS 3 Business Combinations
SLFRS 3 Business Combinations provides guidance on the measurement of net assets acquired
in a business combination and the calculation of goodwill.
SLFRS 3 deals with business combinations and in particular addresses the recognition and
measurement of the following at the acquisition date:
• The assets and liabilities of the acquired subsidiary (the acquiree) at the
acquisition date
• Consideration paid for shares in the acquiree
• The non-controlling interest in the acquiree.

Definitions:
SLFRS 3 provides a number of definitions including the following:
• Acquiree is the business that the acquirer obtains control of in a business combination.
• Acquirer is the entity that obtains control of the acquiree.
• Acquisition date is the date on which the acquirer obtains control of the acquiree.
• Business combination is a transaction or other event in which an acquirer obtains
control of one or more businesses.
• Contingent consideration is usually an obligation of the acquirer to transfer additional
assets or equity interests to the former owners of an acquiree as part of the exchange
for control of the acquiree if specified future events occur or conditions are met.
• Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date.
• Goodwill is an asset representing the future economic benefits arising from other
assets acquired in a business combination that are not individually identified and
separately recognized.
• An asset is identifiable if it either:

(a) is separable i.e. capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a
related contract, identifiable asset or liability, regardless of whether the entity
intends to do so; or
(b) Arises from contractual or other legal rights, regardless of whether those rights
are transferable or separable from the entity or from other rights and obligations.
• Non-controlling interest is the equity in a subsidiary not attributable, directly or

indirectly, to a parent.
 The acquisition method
1 Acquirer is One party must be the acquirer; a business

identified combination cannot be a merger.
2 Acquisition date The acquisition date is the date on which control is

is Determined gained; this is normally the date on which
consideration is transferred and assets and liabilities
acquired.
The acquisition method takes a four-step approach:

3 Assets, liabilities Identifiable assets, assumed liabilities and the non-
and NCI of controlling interest should be recognized on
acquiree are acquisition. Some assets or liabilities that were not
recognized and previously recognized by the acquiree may be
measured recognized on consolidation eg internally generated
intangible assets.
4 Goodwill is Goodwill is the excess of the fair value of
recognized and consideration transferred plus the non-controlling
measured interest over the fair value of identifiable net assets
acquired.
 Goodwill
Goodwill arises in consolidated financial statements as a consolidation adjustment and is
calculated as:
Rs
Fair value of consideration transferred X
Non-controlling interest X
Less: Fair value of identifiable assets acquired and liabilities Assumed (X)
Goodwill X
 Consideration
Consideration of any form is included in the calculation of goodwill at the acquisition date
fair value. Acquisition costs are not part of consideration; these are expensed as incurred.
Contingent consideration is included at its acquisition date fair value. The acquirer may be
required to pay contingent consideration in the form of equity or of a debt instrument or
cash. Debt instruments are presented in accordance with LKAS 32.
Contingent consideration may occasionally be an asset, for example if the consideration has
already been transferred and the acquirer has the right to the return of part of it, an asset
may occasionally be recognized in respect of that right.
Post–acquisition, the subsequent accounting for contingent consideration depends on the
circumstances:
(a) If the change in fair value is due to additional information obtained that affects the
position at the acquisition date, goodwill should be re-measured.
(b) If the change is due to events which took place after the acquisition date, for example,
meeting earnings targets:
(i) Account for under LKAS 39 if the consideration is in the form of a financial
instrument, for example loan notes.
(ii) Account for under LKAS 37 if the consideration is in the form of cash.
(iii) An equity instrument is not remeasured.
 Non-controlling interest
SLFRS 3 views a group as an economic entity. This means that it treats all providers of
equity – including non-controlling interests – as shareholders in the group, even if they are
not shareholders of the parent.

It is for this reason that the non-controlling interests are included in the calculation of
goodwill.
SLFRS 3 applies a different rule to the measurement of the non-controlling interest at
acquisition depending on whether the relevant shareholders are entitled to a proportionate
share of the entity’s net assets in the event of a liquidation.
• Where non-controlling interest shareholders are entitled to a proportionate share of the
net assets on a liquidation, the non-controlling interest at acquisition is measured
either at fair value or as a proportionate share of the fair value of the acquiree’s
identifiable net assets. This choice is available on a transaction by transaction basis.
• Where non-controlling interest shareholders are not entitled to a proportionate share of
the net assets on a liquidation, the non-controlling interest is measured at fair value.
The non-controlling interest at fair value will be different from the non-controlling interest
as a proportionate share of the acquiree's net assets. The difference is goodwill attributable
to non-controlling interest, which may be, but often is not, proportionate to goodwill
attributable to the parent.
 Assets and liabilities acquired

The net assets of the subsidiary on the acquisition date are measured at fair value for
inclusion within the consolidated financial statements and the goodwill calculation.
• The basic recognition rule is that assets and liabilities must meet the definitions of
assets and liabilities in the Conceptual Framework and must be part of the business
combination transaction rather than a separate transaction.
• Fair value is normally determined by reference to SLFRS 13 Fair Value Measurement.
• The subsidiary company may incorporate fair value adjustments in its own financial
statements; if it does not, fair value adjustments must be made as a consolidation
adjustment.
• SLFRS 3 provides guidance on the recognition of certain assets and liabilities as
follows:
 Restructuring and future losses

An acquirer should not recognize liabilities for future losses or other costs expected to be
incurred as a result of the business combination.
SLFRS 3 explains that a plan to restructure a subsidiary following an acquisition is not a
present obligation of the acquiree at the acquisition date. Neither does it meet the definition
of a contingent liability. Therefore an acquirer should not recognize a liability for such a
restructuring plan as part of allocating the cost of the combination unless the subsidiary was
already committed to the plan before the acquisition.
This prevents creative accounting. An acquirer cannot set up a provision for restructuring or
future losses of a subsidiary and then release this to profit or loss in subsequent periods in
order to reduce losses or smooth profits.

 Intangible assets
The acquiree may have intangible assets, such as development expenditure. These can be
recognized separately from goodwill only if they are identifiable. An intangible asset is
identifiable only if it:
(a) Is separable, i.e. capable of being separated or divided from the entity and sold,
transferred, or exchanged, either individually or together with a related contract, asset
or liability, or
(b) Arises from contractual or other legal rights
 Contingent liabilities
Contingent liabilities of the acquirer are recognized if their fair value can be measured
reliably. A contingent liability must be recognized even if the outflow is not probable,
provided there is a present obligation.
This is a departure from the normal rules in LKAS 37; contingent liabilities are not normally
recognized, but only disclosed.
After their initial recognition, the acquirer should measure contingent liabilities that are
recognized separately at the higher of:
(a) The amount that would be recognized in accordance with LKAS 37
(b) The amount initially recognized
 Accounting for goodwill

Positive goodwill is recognized at the acquisition date as a group asset. It is not amortized,
but must be tested for impairment at least annually.
Negative goodwill (gain on a bargain purchase) is credited to profit or loss immediately.
Before recognizing a gain on a bargain purchase the acquirer must:
(i) Reassess whether it has correctly identified all of the assets acquired and all of the
liabilities assumed and must recognize any additional assets or liabilities that are
identified in that review
(ii) Review the procedures used to measure each element of the goodwill calculation.
 Measurement period adjustments

Sometimes the fair values of the acquiree's identifiable assets, liabilities or contingent
liabilities or the cost of the combination can only be determined provisionally by the end of
the period in which the combination takes place.
In this situation, the acquirer should account for the combination using those provisional
values and then continue to work to identify actual values.
The period during which this work to identify actual values is carried out is known as the
measurement period. It ends on the earlier of:
• The date by which the acquirer has received all of the information it was seeking or
learns that the information cannot be obtained, or

• 12 months after acquisition.
During this period the acquirer may adjust provisional amounts to reflect new information
obtained about facts and circumstances that existed on the acquisition date. Amounts are
adjusted retrospectively, meaning that the goodwill initially calculated may change.
Any adjustments after the measurement period are recognized only to correct an error in
accordance with LKAS 8.

Part II - FAIR VALUES
Fair values of consideration and nest assets of the subsidiary

To ensure that an accurate figure is calculated for goodwill,
 The consideration paid for a subsidiary must be accounted for at fair value.
 The subsidiary’s identifiable assets and liabilities acquired must be accounted for at
their fair values.
1. Recognition of depreciable non-current assets at fair values as of the recognition

date. (Revaluation adjustment.)
2. Recognition of unrecorded identifiable intangibles.
The acquirer should recognize, separately from goodwill, the identifiable intangible
assets acquired in a business combination existing as of the acquisition date. An
asset is identifiable if it meets either the seperability or contractual legal criteria in
LKAS 38.
Initial Recognition in group Accounts:

Intangible assets Dr
Cost of Control Cr
Subsequent Amortization
Retained earnings of Subsidiary Dr
Intangible assets Cr
3. Recognition of unrecorded contingent liabilities and contingent assets of

subsidiary (as of acquisition date) and subsequent crystallization.
SLFRS 3 (business combinations) requires the recognition of unrecognized

contingent liabilities and contingent assets to the group existing as of the acquisition
date. Net assets of the subsidiary company as at the acquisition date are determined
including contingent liabilities and contingent assets in order to determine the
goodwill.
Contingent liability:
A possible obligation depending on whether some uncertain future event occurs, or a
present obligation but payment is not probable or the amount cannot be measured
reliably.
Contingent asset:
A possible asset that arises from past events, and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity.

 Dividend adjustment
Paid out of post-acquisition Paid out of pre-acquisition profit

profit of the subsidiary of the subsidiary.
(i.e. parent acquired shares in cum
div basis.)
Paid by the
No any adjustment needed in Correction Entry
subsidiary and
consolidation Consolidated retained earnings Dr
received to the
parent (Interim Cost of control Cr
Dividend)
Dividend
Cancellation required: 1. Correction Entry
proposed by the
subsidiary and Consolidated retained earnings Dr
accrued by the
Div. Payable of subsidiary Co. Cost of control Cr
parent as
Dr
dividend 2. Cancellation required:
receivable Div. Receivable of Parent Co. Cr Div. Payable of subsidiary Co. Dr
Div. Receivable of Parent Co. Cr
Dividend
1.Record the dividend 1.Record the dividend receivable
proposed by the
receivable
subsidiary but Dividend Receivable of parent Co. Dr
not accrued by the Dividend Receivable of parent Co. Cost of Control Cr
parent as Dr
dividend Consolidated Retained Earnings 2. Cancellation required:
receivable Cr
Div. Payable of subsidiary Co. Dr
2. Cancellation required: Div. Receivable of Parent Co. Cr
Div. Payable of subsidiary Co. Dr

Div. Receivable of Parent Co. Cr
 Calculation of cost of investment
The cost of acquisition includes the following elements.

 Cash paid
 Fair value of any other consideration
 Deferred consideration
 Contingent consideration
 Share exchanges
1. Contingent consideration
The consideration the acquirer transfers in exchange for the acquiree includes any asset or
liability resulting from a contingent consideration arrangement. Contingent consideration is
defined as follows.

‘Usually, an obligation of the acquirer to transfer additional assets or equity interests to the former
owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur
or conditions are met. However, contingent consideration may also give the acquirer the right to the
return of previously transferred consideration if specified conditions are met.’
Contingent consideration is recognized as part of the consideration transferred in exchange

for the acquiree, measured at its acquisition-date fair value.
An obligation to pay contingent consideration is classified as a liability or as equity on the

basis of the definitions of an equity instrument and a financial liability in paragraph 11 of
IAS 32 Financial Instruments: Presentation, Where the purchase agreement includes a right to
the return of previously-transferred consideration if specified conditions for a repayment are
met, that right to return is classified as an asset by the acquirer.
2. Deferred consideration
Deferred consideration should be measured at fair value at the date of acquisition. (i.e.
promise to pay an agreed sum on a predetermined date in the future taking into account the
time value of money)
 Intra-Group Trading
Types of intra-group trading

Parent and subsidiary may well trade with each other leading to the following potential
problem areas.
 Current accounts between parent and subsidiary.
 Loans held by one company in the other
 Dividends and loan interest
 Unrealized profits on sales of non - current Assets
 Goodwill Impairment
- SLFRS 03 governs accounting for all business combinations

- Goodwill is the future economic benefits arising from assets that are not capable of
being individually identified and separately recognized.
- Goodwill is calculated as the excess of the cost of the business combination over
acquirer’s interest in the net fair value of the identifiable assets, liabilities and
contingent liabilities.
- All business combinations within this broad scope are to be accounted for by
applying acquisition method that we are familiar with.

1. Treatment for goodwill
The positive goodwill that arises in a business combination
- is recognized as an intangible asset
- is tested annually for possible impairments
- amortization is not permitted by the standard
Impairment
(if:RV<CV)
Recoverable value
(higher of VIU and Carrying value
FVLCS)
Value in Use Fair value less cost to sell
When an impairment is observed in a cash generating unit, the impairment loss is applied to
all assets, on a proportionate, in the cash generating unit. and the goodwill is eliminated in
full. However the goodwill impairment calculation varies depending on what method is
adopted for non-controlling shareholders. (NCI measured at fair value or proportionate net
asset basis)
Question 01:
Following information is taken from the books of “B” Ltd as at 31.12.2019.
Share capital 100,000
Retained Earnings 50,000
A Ltd acquired 80% of Equity shares in “B” Ltd on 1.1.2017 when “B” Ltd’s retained
Earnings were Rs. 20,000. A Ltd invested Rs. 130,000 for the acquisition.
B Ltd has two cash generating units with the following information.
CGU1 CGU2
Carrying values of the other
Assets excluding Goodwill 200,000 120,000
Goodwill allocation 60% 40%
Recoverable values 205,000 122,000
The fair values of the net assets attributable for the non-controlling shareholders were Rs.
30,000 as of the acquisition date. Determine the amount of Goodwill impairment.

Question 02:
The following statements of financial positions were extracted from the books of Alpha Ltd
and Beta Ltd as at 31.12.2019
Alpha Ltd Beta Ltd
Non-current Assets '000 '000
Property Plant & equipment 160,000 100,000
(-) Acc. Depreciation (96,000) (70,000)
Written down value 64,000 30,000
Investment in Beta Ltd 150,000 -
Current Assets
Inventory 9,000 6,000
Trade & other receivable 12,600 16,000
Cash & Bank 6,400 6,000
242,000 58,000
Equity & Liabilities
Share capital 70,000 24,000
Retained earnings 56,000 16,000
General reserves 82,000 8,000
Current Liabilities
Trade payables 10,400 3,600
Bank OD 23,600 6,400
242,000 58,000
Following additional information is provided.

01. On 1st January 2017, Alpha Ltd acquired 90% of equity shares in Beta Ltd. When the
retained earnings and the general reserves stood at Rs. 10,000,000 and Rs. 6,000,000
respectively.
02. The fair values of the assets were observed as follows as of the acquisition date.
Property Plant & equipment fair value was Rs. 80,000,000. The fair value of the
inventory was higher by Rs. 4,000,000 than the book value. And the fair value of the
other assets was observed to be almost equal to the book values.
03. Beta Ltd, as of the acquisition date, had a brand name not recorded in the books of
Beta Ltd at Rs. 8,000,000.
04. Both companies depreciate assets by 10% per annum on cost.
05. The group amortizes the intangible assets by 10% per annum.
06. It is found that the goodwill on consolidation has been impaired by Rs. 1,776,000 as
at 31.12.2019.
You are required to prepare the consolidated statement of financial position as at
31.12.2019.

Question 03:
The following statements of financial position were taken from the books of Amal Ltd and
Bimal Ltd as at 31.12.2019.
Amal Ltd Bimal Ltd
Non current Assets '000 '000
(-) Acc Depreciation (2,400) 3,200
Investment in Bimal Ltd 7,000 -
Current Assets
Cash & cash equivalent 6,200 2,800
34,000 14,600
Ordinary Share capital 12,000 4,000
Non Current Liabilities
10% Debentures 6,000 30,000
Current Liabilities
Bank OD 2,000 1,000
34,000 41,600
Following information is provided.

1) Amal Ltd acquired 75% of the equity shares of the Bimal Ltd on 1 st January 2017 when
retained earnings were Rs. 2,400,000 (a debit balance)
2) The fair value of the assets and liabilities were almost equal to the book value except the
following.
Property plant and equipment had a fair value of Rs. 10,000,000 and the inventory as of
the acquisition date had a fair value which is higher by Rs. 1,200,000 than the book value.
3) There was a contingent liability as of the acquisition date at Rs. 2,200,000 and this was
crystalized at Rs. 2,200,000 on 01.10.2018
4) Both companies depreciate the assets by 10% per annum on cost.
5) The balance of the general reserve as of the acquisition date was Rs. 2,000,000.
6) The fair value of the net assets attributable to NCI was Rs. 7,000,000.
7) It is found that the goodwill on consolidation has been impaired by Rs. 3,440,000 as at
31.12.2019
31.12.2019.

Question 04:
The following statements of financial position were taken from the books of Amila Ltd and
Dinuka Ltd as at 31.12.2019.
Amila Ltd Dinuka Ltd
Investment in Dinuka Ltd 34,000 9,000
Current Assets
Prepayments 3,800 2,400
84,000 34,000
10% Debentures 4,000 4,000
Bank loans - 2,000
Current Liabilities
Tax payables 1,800 2,200
Accrued expenses 400 2,400
84,000 34,000
You are provided with the following information.

01. Amila Ltd acquired 75% of the equity shares in Dinuka Ltd on 1at January 2019 when
the fair value of assets and liabilities were as follows.
Total Non current assets at fair value 32,000,000
Total current assets at fair value 10,000,000
Non current liabilities 8,000,000
Current liabilities 10,000,000
02. An extract of the income statement for the year ending 31st December 2019 is given
below.
Profit before tax 20,000,000
Taxation (18,000,000)
Retained profit for the year 2,000,000

03. 50% of the fair value reserve to be allocated to a land. 30% is attributable to a plant and
the balance is attributable to inventory. The additional depreciation charge required due
to the fair value adjustment is Rs. 400,000 per annum. The land, fair valued on the
acquisition date was sold on 1st October 2019.
04. Dinuka Ltd had an unrecorded intangible asset of Rs. 6,000,000 and a contingent liability
of Rs. 10,000,000 as of the acquisition date.
05. The group amortizes the intangible assets over 5 years period.
06. The fair value of the net assets attributable to non-controlling shareholders as at the
acquisition date was Rs. 10,000,000 and the general reserve was Rs. 2,000,000 on that
date.
07. It is found that the goodwill on consolidation has been impaired by Rs. 7,200,000 as at
31.12.2019
31.12.2019
Question 05:
Following statements of financial position were extracted from the books of Sahan PLC and
Gihan PLC as at 31.12.2019
Sahan PLC Gihan PLC

Investment in Gihan PLC 3,200 -
Current Assets
Inventory 600 400
Trade & other receivable 800 280
Cash & cash equivalent 200 120
10,800 5,600
Other reserves 2,400 800

Bank loans 500 1,100
Current Liabilities
Trade payables 2,196 716
Dividend proposed 504 384
10,800 5,600
1). Sahan PLC acquired 80% of the shares in Gihan PLC on 01.01.2018 and the net assets
were as follows on that date.

Reserve balance as of the acquisition date
Retained earnings 1,200,000
Other reserves 400,000
Fair value of the overall net assets on the acquisition date 4,000,000
Any amount of fair value in excess of the book values of the net assets is attributable to a
plant that had a life time of 8 years as of the acquisition date.
2). The above net assets total does not include the fair value of an intangible asset that had
a fair value of Rs. 200,000. The group amortizes the intangible assets over 5 year’s
period.
3). The dividends in the both companies have been declared out of the profits of 2019.

31.12.2019.
Question 06:
Following statements of financial position have been extracted from the books of Altra PLC
and Bingo PLC as at 31st December 2019.
Altra PLC Bingo PLC

Investment in Bingo PLC 5,600 -
Current Assets
Trade & other receivable 640 520
Cash & bank 440 400
12,480 6,000
Share capital (Rs. 1 per share) 5,000 2,400
Other reserves 1,600 600

Bank loans 2,800 400
Current Liabilities
Trade payables 680 760
Dividend proposed 600 600
Bank OD 600 240
12,480 6,000

1). Altra PLC acquired 75% of the shares on 01.01.2017 and the following fair value details
are provided.
Reserves on the acquisition date
Retained earnings 800,000
Other reserves 400,000
Fair value of the overall net assets on the acquisition date 4,400,000
2). The above fair value of the net assets does not include Rs. 600,000 worth of an intangible
asset and Rs. 200,000 fair valued contingent liabilities.
3). Any fair value amount in excess of the book value should be attributable to inventory by
Rs. 160,000 and the balance to plant & machinery that had a 5 years life time from the
acquisition date.
4). The dividends proposed in both companies are out of the profits of 2019.
5). It is found that the goodwill on consolidation has been impaired by Rs. 500,000 as at
31.12.2019

31.12.2019.
Question 07:
Himalaya Ltd, a public listed company acquired 80% of Samanala Ltd’s shares on 1 st
October 2018. Himalaya Ltd paid an immediate Rs. 2 per share in cash and agreed to pay a
further Rs. 1.20 per share if, Samanala Ltd makes a profit within two years of its acquisition.
Himalaya Ltd has not recorded the contingent consideration.
The statements of financial position as at 30.09.2019 of the two companies are shown below.
Himalaya Ltd Samanala Ltd

Non current Assets Million Million
Property Plant & equipment 2,925 860
Investments (Note 02) 1,125 65
Software (Note 03) - 200
4,050 1,125
Current Assets
Inventory 425 210
Account receivable 475 180
Tax asset - 400
Bank 100 -
1,000 790
5,050 1,915

Capital and Reserves
Ordinary share of Rs. 1 2,000 500
Accumulated profit 01.10.2016 1,150 750
Profit/ Loss for the year 500 (175)
3,650 1,075

12% Debentures - 175
8% intercompany loan (Note 02) - 225
- 400
Current Liabilities
Account payables 1,050 355
Tax liability 350 -
Bank OD - 85
5,050 1,915
The following information is relevant.
1). At the date of acquisition, the fair value of Samanala PLC ‘s net assets were
approximately equal to their book values.
2). Included in Himalaya Plc’s investments, there is a Loan of Rs. 250 Mn made to Samanala
PLC on 28th September 2019, Samanala Plc paid Rs.45 Mn to Himalaya Plc. This represented
interest of Rs. 20 million for the year and the balance was the capita repayment. Himalaya
Ltd had not received nor accounted for the payment, but it had accounted for the loan
interest receivable as a part of its accounts receivable figure. There are no other intra group
balances.
3). The software was developed by Himalaya Ltd during 2016 at a total cost of Rs. 150
million. It was sold to Samanala Ltd for Rs 250 million immediately after its acquisition. The
software had an estimated life of five years and is being amortized by Samanala Ltd on
straight line basis.
30.09.2019.
Question 08:
Sirisara PLC acquired 75% of Pehesara Ltd’s ordinary shares on 1 st April 2019. Sirisara PLC
paid Rs. 3.50 per share in cash and agreed to pay a further amount of Rs. 540 million on 1 st
April 2020. Sirisara PLC’s cost of capital is 8% per annum. Sirisara PLC has already recorded
the cash consideration of Rs. 3.50 per share. The summarized statements of financial position
are extracted from the books of Sirisara PLC and Pehesara Ltd.

Sirisara PLC Pehesara PLC
Non current Assets Million Million
Development cost - 200
Investments 1,875 100
Current Assets
Cash 665 455
4,640 2,355
Capital and Reserves
Ordinary share (Rs. 1 per share) 1,750 600
Revaluation reserve
Retained earnings 01.04.2019 800 670
Profits - 31.03.2020 950 380

10% intercompany loan 225 - 300
Current Liabilities
Account payables 1,140 405
4,640 2,355
You are provided with the following information

1. Sirisara PLc has a policy of revaluing land & building to fair values. At the date of
acquisition Pehesara Ltd’s land & building had a fair value which is higher by Rs.
100 million than the book value and this had increased by further Rs. 20 million as at
31.03.2020.
2. Included in Sirisara PLC’s investments is a loan of Rs. 300 million made to Pehesara
Ltd at the date of acquisition. Interest is payable annually in arrears. Pehesara Ltd
paid the interest due for the year on 31.03.2020. But Sirisara PLC did not receive this
until the end of the reporting period and not accounted for the accrued interest from
Pehesara Ltd.
3. Pehesara Ltd had established a line of products under the brand name of ‘T’ acting
on behalf of Sirisara PLC. A firm of specialists had valued the brand name at a value
of Rs. 200 million with an estimated life of 10 yars as at 01.04.2019. The brand is not
included in Pehesara Ltd’s statement of financial position.
4. Pehesara Ltd’s development project was completed on 30th September 2019 at a cost
Rs. 250 million. Rs. 50 million of this had been amortized by 31 st March 2020.
Development costs capitalized by Pehesara Ltd at the date of acquisition were Rs. 90
million. Sirisara PLC’s directors are of the opinion that Pehesara Ltd’s development
costs do not meet the criteria in LKAS 38 ‘Intangible assets’ for recognition as an
asset.
5. Pehesara Ltd sold goods to Sirisara Ltd during the year at a profit of Rs. 30 million.
One One third of these goods were still in the inventory of Sirisara PLC at 31st March
2020.
6. It is found that the goodwill on consolidation has been impaired by Rs. 60,000 as at
31.03.2020
31.03.2020
Question 09:
Following statements of financial position have been extracted from the books of Arunalu
PLC and Udaya PLC as at 31st December 2019.
Arunalu PLC Udaya PLC

(-) Acc Depreciation (6,000) (8,000)
Investment in Udaya PLC 20,000 -
Current Assets
62,000 31,000
Ordinary Share capital (Rs. 1
each) 46,000 20,000
Non-current Liabilities
10% Loan notes 2,000 2,000
Current Liabilities
Dividend proposed 3,200 2,000
62,000 31,000
1. Arunalu PLC acquired 80% of the equity shares in Udaya PLC on 1 st Jan 2016 when Udaya
PLC had a retained earnings balance of Rs. 2,000,000.
2. Arunalu PLC made immediate cash payment of Rs. 1.25 per each share acquired on the
acquisition date. Arunalu PLC also issued one share for every four shares acquired in Udaya
PLC. The price of a share of Arunalu PLC on the acquisition date was 1.50 per share. The

share issue is not so far recorded in the books of the parent company. However dividends
have been proposed accordingly. Arunalu PLC also agreed to pay another Rs. 0.50 for each
share acquired, if the cumulative post acquisition profit will be Rs. 3,000,000 by 31 st
December 2019. Directors of Udaya PLC are sure that Udaya PLC will make profits for the
year of 2020. Arunalu PLC’s cost of capital is 10%.
3. Arunalu PLC sold Rs. 8,000 book value of an asset on acquisition date to B ltd. The sales
value of the asset as was Rs. 11,000,000. Machine shall be depreciated over its remaining
useful life time in number of years of 8 as at the acquisition date.
4. The following were noted at the acquisition date.

Retained earnings Rs. 2,000,000
Fair value of PPE Rs. 24,000,000
Unrecorded intangibles Rs. 12,000,000
Unrecorded contingencies Rs. 2,000,000
B Ltd had a brought forward tax loss of Rs. 20,000,000 and the corporate tax rate is 20%.
Both companies depreciate PPE by 10% per annum on cost.
5. Inventories of Udaya PLC include Rs. 4,000,000 worth of goods purchased from Arunalu
PLC. Arunalu PLC keeps a markup of 1/3 on cost when the goods are invoiced by Arunalu
PLC to Udaya PLC
6. Dividends in both companies have been declared out of the profits in 2019.

31.12.2019.
Question 10:
Following statements of financial position have been extracted from the books of Supiri PLC
and Sujaya PLC as at 31st December 2019.
Supiri PLC Sujaya PLC

(-) Acc Depreciation (12,000) (10,800)
Investment in Sujaya PLC 8,000 -
Current Assets
Trade receivable 2,400 3,400
Cash & Bank 7,200 6,800
42,600 32,000

Ordinary Share capital (Rs. 1 each) 16,000 8,000
General reserve 4,000 3,000
10% Loan notes 1,000 6,000
Current Liabilities
Bank OD 4,000 4,000
42,600 32,000
You are provided with the following information

1) Supiri PLC acquired 80% of the equity shares in Sujaya PLCon 1st January 2018. The
following were noted in relation to Sujaya PLC as at the acquisition date.
Retained Earnings Rs. 4,000,000
General Reserves Rs. 2,000,000
Contingent Liabilities Rs. 8,000,000
Brought forward tax loss Rs. 20,000,000
2) Loan notes in the subsidiary company Is a deep discount bond redeemable or
convertible in to equity shares after 5 years. This was issued on 1 st January 2018 and
the interest rate for non-convertible items in the market is 20%. The discount at the
issue Rs, 120,000 has been taken to the profit and loss account. Interests paid during
two-year period have been taken to the profit and loss account.
3) Proposed dividends in both companies have declared out of the profits in 2019
4) Supiri PLC made an immediate cash payment of Rs. 1.25 per each share acquired on
1st Jan 2018. Supiri PLC also issued 1 share for each 4 shares acquired in Sujaya PLC
and the price of a share of Supiri PLC was Rs. 3 as of the acquisition date. Supiri PLC
also agreed to pay another Rs. 6,000,000 on 31.12.2020 provided Sujaya PLC will
make a cumulative post acquisition profit of Rs. 2,000,000 by 31.12.2020. However the
directors are sure that Sujaya PLC will not make losses for the year of 2020.
5) Corporate tax rate is 20% and the contingent liabilities of Sujaya PLC recognized on
the acquisition date crystalized at Rs. 10,000,000 on 01.07.2019.
6) Included in inventories of Supiri PLC is Rs. 3,000,000 worth of inventories purchased
from Sujaya PLC and Sujaya PLC keeps a mark-up of 50% on cost.
31.12.2019

Question 11:
On 1st May 2019 Kalana PLC bought 60% of Sithum PLC equity shares paying Rs. Rs.
76,000,000 in cash. The summarized statements of financial position for the two companies
as at 30th September 2019 are as follows.
Kalana PLC Sithum PLC
Investment in Sujaya PLC 98,000 -
Current Assets
Inventory 15,000 17,000
Receivables 19,000 20,000
Cash 2,000 -
134,000 37,000
Share Capital 50,000 40,000
8% Loan notes - 20,000
Current Liabilities
272,000 152,000
The following information is provided.
- The inventory of Sithum PLC includes Rs. 8,000,000 worth of goods purchased from
Kalana PLC at cost plus 25%.
- On 1st June 2019, Sithum PLC transferred an item of plant to Kalana PLC for Rs.
15,000,000. Its carrying amount at that date was Rs. 10,000,000. The asset had a
remaining useful life of 5 years.
- The Kalana group values the non-controlling interest using the fair value method. At the
date of acquisition the fair value of the 40% non-controlling interest was Rs. 50,000,000.
Sithum PLC earned a profit of Rs. 9,000,000 in the year ended 30th September 2019.
- The loan note in Sithum PLC’s books represents money borrowed from Kalana PLC
during the year. All of the loan note interest has been accounted for.
- Included in the Kalana PLC’s receivables is Rs. 4,000,000 relating to inventory sold to
Sithum PLC during the year. Sithum PLC raised a cheque for Rs. 2,500,000 and sent it to
Kalana PLC on 29th November 2019. Kalana PLC did not receive this cheque until 4th
December 2019.
30.11.2019

Question 12:
Following statements of financial position were taken from the books of Asha Plc and
Bhairav Plc as at 31.12.2019.
Asha PLC Bhairav PLC

Cum Dep. (30,000) (30,000)
WDV 45,000 30,000
Investment in Bhairav PLC 20,000 -
Current Assets
Cash 2,100 3,300
77,500 53,000
Share Capital (Rs1/share) 20,000 12,500
8% Loan notes 14,000 10,000
Current Liabilities
Accrued Expenses 7,000 8,000
77,500 53,000
1. Asha acquired 80% of equity shares on 1st January 2018 and the following balances
were noticed as of the acquisition date.
Brought forward tax losses 30,000,000
Unrecorded intangibles 4,000,000
A land with a book value of 10,000,000 had a fair value of 15,000,000
Contingent liabilities 1,000,000
2. Corporate tax rate to be taken as 20% and both companies depreciate assets by 10%
per annum.
3. Asha paid Rs.1.00 per share immediately. Asha also issued 1 share for each 2 shares
acquired in Bhairav on the acquisition date, the Market price of a share of Asha Plc
on that date was Rs.5.00. the share issue is not recorded in the books of Asha as yet.
However dividends have been proposed accordingy.

4. ASHA Ltd also acquired all the debentures in B Ltd on 1st January 2019 at par. B
Ltd has provided for debenture interest and are include in Accrued Expenses.
5. B Ltd has two cash generating units Namely CGU 1 AND CGU 2, the details of
which are given below.
CGU 1 CGU 2
Carrying value of other assets 35,000,000 15,000,000
Excluding Goodwill
Allocation of Goodwill 90% 10%
Recoverable values 43,125,000 14,125,000
6. The fair value of the net assets attributable for non-controlling shareholders was
Rs. 45,000,000.
7. The contingent Liabilities recognized on the date of the acquisition had crystallized
on 15th October 2020 at Rs. 2,000,000.
8. A Ltd started trading with B Ltd, ever since the current group was created, and the
details of the inventories arising from the intercompany trading are given below.
31.12.2020
Inventories 1,200,000
9. B Ltd keep a profit mark – up of 50% on cost when the goods are invoiced by ‘A’
Ltd to ‘B’ Ltd.
10. On 1st January 2012, B Ltd sold Rs. 5,000,000 worth of an asset to B Ltd at Rs.
8,000,000.
11. ‘B’ Ltd has provided for debenture interest and is included in accrued expenses of
‘B’ Ltd. However, A Ltd has not recognized the interest income as yet.
12. Intangible assets amortize 20% per annum. Tax bases of unrecorded intangibles
and contingent liabilities are Nil.
You are required to prepare, the consolidated statement of financial position as at 31st
December 2019
Question 13:
Following statements of financial position were taken from the books of Anil Plc and
Bharathi Plc as at 31.12.2019
Anil PLC Bharathi PLC

Investment in B PLC 60,000 -
Investment Property 20,000 -
Current Assets
Inventory 13,000 11,000

Cash 9,000 10,000
170,000 100,000
Share Capital (Rs1/share) 40,000 15,000
Revaluation Reserve 15,000 10,000
General Reserve 28,000 14,000
20% Loan notes 4,000 6,000
Current Liabilities
Accrued Expenses 29,000 7,000
170,000 100,000
3 On 1st January 2017, A Ltd acquired 2/3 of ordinary shares when the reserves and the
fair value of the assets and liabilities were as follows.
Non-current assets 80,000,000
Current assets 40,000,000
Total Liabilities 45,000,000
Retained earnings of the subsidiary company as of the acquisition date was Rs.
16,000,000. B Ltd assets were revalued on 31st December 2018 and the revaluation reserve
was created due to that.
4 General Reserve was increased by Rs. 4,000,000 subsequent to the acquisition. The
increase in the fair value is attributable to a non-depreciable land as of the acquisition
date. The revaluation reserve appearing in B Ltd’s statement of financial position Rs.
10,000,000 is the revaluation reserve created due to the revaluation of other depreciable
assets in the subsidiary company.
5 As of the acquisition date, A Ltd made an immediate cash of Rs. 6 per every share
acquired by A Ltd in B Ltd. A Ltd also issued Rs. 100 debentures of 300,000 at par value.
However, this debenture issue has not yet been recorded in the books of A Ltd.
6 The details of intercompany trading are as follows.
Stock as at Stock as at
Selling Company Buying Company
1/1/2018 31/12/2018
A Ltd B Ltd 4,000,000 6,000,000
A Ltd keeps a mark-up of 25% on cost.

7 The proposed dividend of both companies are out of the profits in 2018.
8 B Ltd adopts the proportionate net asset method for the non-controlling interest.
9 B Ltd was identified to have 2 cash generating units with the following details'
CGU 1 CGU2
42,000,000 29,000,000
Carrying Value of other assets except for goodwill
80% 20%
Allocation of goodwill
50,000,000 35,000,000
Recoverable Value
10 Asset shown under investment properties of A Ltd are the building rented out by A Ltd
to B Ltd under an operating lease agreement.
You are required to prepare the consolidated statement of financial position as at 31 st

December 2019.

Part III - CONSOLIDATED INCOME STATEMENT
Principles of Consolidated Income Statement

Basic Principle
The consolidated income statement shows the profit generated by all resources shown in the
related consolidated statement of financial position. i.e. the net assets of the parent company
and its subsidiary.
The Consolidated Income Statement follows these basic principles.
- From revenue to profit for the year include all of P’s income and expenses plus all of
S’s income and expenses (reflecting control of S)
- After profit for the year shows split of profit between amounts attributable to the
parent’s shareholders and the non-controlling interest (to reflect ownership)
The Mechanics of Consolidation

As with the statements of financial position, it is common to use standard workings when
producing a consolidated income statement.
1) Group Structure Diagram
2) Net assets of subsidiary at acquisition (required for goodwill calculation, if asked to

calculate)
3) Goodwill calculation (if asked to calculate goodwill or you are required to calculate, an
am impairment that is to be charged to profits)
4) Non-controlling interest (NIC) share of profit.
Inter Company Trading and Provision for Unrealized Profits
The effect of intra – group trading must be eliminated from the consolidated income
statement.
Such trading will be included in the sales revenue of one group company and the purchases
of another.
 Consolidated Sales Revenue = Parent's Revenue + Subsidiary Revenue

- Intra-Group Sales
 Consolidated Cost of Sales = Parent’s Cost of Sales + Subsidiary Cost of

Sales – Intra group Sales
Adjustments for Dividends
A payment of a dividend by the subsidiary company to the parent company will need to be
cancelled out. The effect of this on the consolidated income statement is;

Only dividends paid by the parent to its own shareholders appear in the consolidated
financial statements. These are shown within the consolidated statement of changes in
equity. Any dividend income shown in the consolidated income statement must arise from
investments other than those in subsidiaries or associates.
Fair Value Adjustment

If a non-depreciable asset is recognized at fair value as a result of the fair value exercise
carried out as at the acquisition date, there are no any effects on the consolidated income
statements.
If a depreciating non-current asset of the subsidiary has been revalued as part of a fair value
exercise when calculating goodwill, this will result in an adjustment to the consolidated
income statement.
The subsidiary’s own income statement will include depreciation based on the value of the
assets held at in the subsidiary’s own statement of financial position.
The consolidated income statement must include a depreciation charge based on the fair
value of the asset, included in the consolidated statement of financial position.
Extra depreciation must therefore be calculated and charged to an appropriate cost category
(usually in line with examiner requirements)
Impairment of Goodwill
Once any impairment has been identified during the year, the charge for the year will be
passed through the consolidated income statement. This will usually, be through operating
expenses. However, always follow instructions from the examiner.
If non-controlling interests have been valued at fair value, a portion of the impairment
expense must be removed from the non-controlling interest’s share of profit.
Non-controlling share of profit calculation, when the non-controlling shareholders are

recognized at their fair value i.e. when the full goodwill method is applied.
Subsidiary profit after tax xxx

Less: Goodwill Impairment (xx)
Non-controlling share of acquisition % x NCI x (xxx)
Non-controlling share of profits xx
Non-controlling share of profit calculation, when the proportionate goodwill is calculated

only for group.
Subsidiary profit after tax xxx

Non-controlling % of acquisition %
Non-controlling share of profits xx
Recognition of Intangible Assets and the Subsequent Amortization
Intangibles not recognized in the books of the subsidiary company, are recognized to the
group as at the acquisition date. This requires the intangibles to be amortized over the life
time determined in the group. Amortization pertaining to the current financial year should

be included in the determination of the current year’s profit and loss, and those pertaining to
the previous years need to be adjusted to the consolidated retained earnings brought
forward calculation.
Non-controlling share of profit should be calculated after deducting the intangible assets
amortization.
Inter Company Expenses
Inter-group expenses are not taken to the consolidated comprehensive income statement
and neither are the Inter-group incomes.
Some of the instances in which inter-group expenses and income are arising are:
 Either of the companies receiving a consultancy fee for providing a consultancy service
to the other company within the group.
 Either of the companies receiving interest for providing a loan to the other company
within the group or subscribing to the debenture capital of the subsidiary company by
the parent company.
 Either of the companies receiving rental income by renting out non-current assets to the
other company within the group.
 Either of the companies receiving the royalty income by the other company within the
group.
However, it should be noted clearly that, the intra group income and expenses are not
adjusted in calculating the non-controlling share of profit for the period.
Effects of Deferred and Contingent Considerations on Comprehensive Income Statement

Consolidation
The consideration the acquirer transfers in exchange for the acquiree includes any asset or
liability resulting from a contingent consideration arrangement. The acquirer shall recognize
the acquisition –date fair value of contingent consideration as part of the consideration
transferred in exchange for the acquiree.
The acquirer shall satisfy an obligation to pay contingent consideration as liability or as

equity on the basis of the definitions of an equity instrument and a financial liability. The
acquirer shall classify as an asset a right to the return of previously transferred consideration
if specified conditions are met.
When the contingent and deferred considerations are recognized as a part of the investment,
the present value of the consideration should be included. And unwinding of the interest
should be recognized as a finance cost against the group profit. Interest component relating
to the current year should be included in to the current year’s profit and loss calculation.
Any interest component relating to the previous years should be adjusted to the retained
profit brought forward figure.

Question 14:
The following income statements were taken from Amanda Ltd and Bhashini Ltd for the
year end 31st December 2019.
Rs.’000
Amanda Ltd Bhashini Ltd
Turn over 75,000 38,000
Cost of Sales 30,000 20,000
Gross Profit 45,000 18,000
Administration Expenses (8,000) (4,000)
Distribution Expenses (12,000) (5,000)
Finance Cost (5,000) (2,000)
Profit before Tax 20,000 7,000
Taxation (4,000) (1,400)
Profit after Tax 16,000 5,600
Retained Profit B/forward 14,000 3,400
Retained Profit C/forward 30,000 9,000
A Ltd acquired 80% equity shares of B Ltd on 1st January 2016 when the retained earnings of
B Ltd were Rs. 1,400,000/-
You are required to prepare the consolidated income statement for the year ending 31 st
December 2019.
Question 15:
Rs.’000
Amal Ltd Bimal Ltd
Sales 300,000 250,000
Cost of Sales (100,000) (100,000)
Gross Profit 200,000 150,000
Other Income 25,000 10,000
Distribution Cost (45,000) (30,000)
Administration Cost (30,000) (60,000)
Finance Cost (20,000) (10,000)
Taxation (30,000) (20,000)

1. A Ltd acquired 80% of ordinary shares on 1st January 2017 when the retained earnings of
B Ltd were Rs. 40,000,000/-.
2. A Ltd sold Rs. 80,000,000 worth of goods to B Ltd during the year and the above value
includes mark up of 25% on the cost. However, B Ltd’s closing stock includes ¼ of the
goods sold.
December 2019.

Question 16
Rs.’000
Anura Ltd Binura Ltd
Sales 70,000 50,000
Cost of Sales (30,000) (20,000)
Other Operating Income 4,000 1,200
Finance Cost (5,000) (1,200)
Taxation 2,400 3,000
Dividends (3,000) (2,000)
You are provided with the following additional information.

 Other operating income of A Ltd includes the dividends received by the parent company
from B Ltd. (Subsidiary Company)
 During the year B Ltd sold Rs. 20,000,000 of goods to A Ltd, and A Ltd is holding
15,000,000 worth of goods as at the end of the reporting period. B Ltd’s markup is 33 1/3
% on cost.
 The above income statements were extracted from the books of A ltd and B Ltd for the
year ending 31st December 2019.
December 2019.
Question 17:
Following income statements were taken from the books of Ananda Ltd and Bharatha Ltd
for the year ending 31st December 2019.
Rs.’000
Ananda Bharatha Ltd
Ltd
Sales 150,000 120,000
Cost of Sales (50,000) (20,000)
Gross Profit 100,000 100,000
Finance Cost (15,000) (5,000)
Taxation (10,000) (10,000)
Dividends (10,000) (20,000)


1. A Ltd acquired 75% of equity shares of B Ltd on 1st January 2018, when the retained
profit was Rs. 25,000,000.
2. B Ltd sold Rs. 40,000,000 worth of goods to A ltd during the year, and A Ltd is holding
Rs. 250,000,000 worth of goods at the end of the reporting period. B Ltd marks up goods
by 25% when the goods are invoiced to A Ltd.
3. Rs. 20,000,000 dividends shown in the income statement of B Ltd are proposed
dividends, for the year of 2019.
You are required to prepare the consolidated income statement for the year ending 31st
December 2019.
Question 18:
Following income statements were taken from Amali Ltd and Bimali Ltd for the year ending
31st December 2019.
Rs.’000
Amali Ltd Bimali Ltd
Turn over 540,000 460,000
Cost of Sales (230,000) (210,000)
Gross Profit 310,000 250,000
Other operating Income - 40,000
Finance Cost (30,000) (5,000)
Taxation (28,000) (14,000)
Dividends (30,000) (40,000)

1) The retained profit of B Ltd on the acquisition date was Rs. 150,000,000/-.
2) A Ltd started trading with B ltd ever since the current group structure was created.
During the current year A Ltd sold Rs. 120,000,000 worth of goods to B Ltd. A Ltd keeps
a markup of 1/3rd on cost in invoicing goods. However, there were inventories of Rs.
50,000,000 and Rs. 40,000,000 respectively as at 1st January 2019 and 31st December 2019.
3) Dividends appearing in the comprehensive income statement of B Ltd are the proposed
dividends for the year of 2019.

4) On the acquisition date, the fair values of assets were noted as follows.
Carrying Value on the Fair Value on the
Asset
Acquisition Acquisition
Land 25,000,000 45,000,000
Plant 50,000,000 70,000,000
The plant had a life time of seven years as at the acquisition date. The Land that was
recognized at the fair value was sold during the year of 2018 at Rs. 150,000,000 plant
depreciation is charged to cost sales.
5) A Ltd acquired 75% of equity shares on 1st January 2017.
You are required to prepare the consolidated comprehensive income statement for the year
ending 31st December 2019.
Question 19:
Following comprehensive income statements were taken from Anula Ltd and Bhagya Ltd
Rs.’000
Anula Bhagya Ltd
Ltd
Turn over 545,000 463,000
Cost of Sales (275,000) (243,000)
Gross Profit 270,000 220,000
Finance Cost (7,000) (35,000)
Taxation (13,000) (25,000)
Other Comprehensive Income
Gain or translation of foreign operation - 12,000
Cash flows hedging 6,000 8,000
Gain on p.p.e revaluations 10,000 15,000
Total comprehensive income for the 86,000 95,000
period
Statement of Changes in Equity for the year ending 31st December 2019.
Rs.’000
A Ltd B Ltd
R/E R/E
Bal/B/f as at 1/1/2019 150,000 170,000
Total Comprehensive income for the 70,000 60,000
period
Dividends - Proposed (20,000) (30,000)
Bal/C/f 200,000 200,000
You are provided with the following additional information.

1) A Ltd acquired 90% of equity shares in B Ltd on 1st January 2016, when the retained
earnings were Rs. 25,000,000.
2) Almost all the assets of B Ltd as of the acquisition date had the fair values which were
almost equal to the book values except for one item of office equipment of which the fair
value was higher by Rs. 20,000,000 than its book value. This asset had a remaining life
time of 4 years as of the acquisition date.
3) The gain on P.P.E revaluation shown under the other comprehensive income of B Ltd is
the revaluation surplus arising from a land revaluation as at 31st December 2019.
4) A Ltd sold a motor vehicle to B Ltd on 1st January 2017 at Rs. 80,000,000/-. The book
value of the asset as of the acquisition date was Rs. 50,000,000/-. The asset had a
remaining life time of 5 years as at the disposal date.
5) B Ltd sold Rs. 120,000,000/- worth of goods to A Ltd during the year and A Ltd was
holding Rs. 40,000,000/- worth of goods unsold as at 31st December 2019. B Ltd keeps a
markup of 1/3rd on cost when the goods are invoiced to A Ltd.
You are required to prepare the consolidated statement of comprehensive income for the
year ending 31st December 2019 and the consolidated statement of equity changes for the
Question 20:
The following comprehensive income statements were taken from the books of Asela Ltd
and Binari Ltd for the year ending 31st December 2019.
Rs.’000
Asela Ltd Binari Ltd
Sales 200,000 150,000
Cost of Sales (50,000) (30,000)
Gross Profit 150,000 120,000
Other Income 28,000 -
Finance Cost (5,000) (19,000)
Taxation 20,000 18,000
Fair Value changes of available sale 15,000 8,000
investments
Total comprehensive income for the period 135,000 68,000
Rs.’000
A Ltd B Ltd
Bal/B/f as at 1/1/2019 150,000 128,000
Total Comprehensive income for the 120,000 60,000

period
Bal/C/f 250,000 178,000
1) A Ltd acquired 75% of equity shares in B Ltd as at 1st January 2016. The following
balances were observed as of the acquisition date.
Fair value of the plant as of the acquisition date 40,000,000
(book value was 30,000,000, Remaining life time is 4 years as of the acquisition date)
2) Dividends income is included in ‘other income’ of A Ltd.

3) The revaluation reserve shown under other comprehensive income of B Ltd is the
reserve arose due to the revaluation of a land in B Ltd as of 31st December 2019.
4) The goodwill has impaired by Rs. 2,000,000 during the year ended 31st December 2019
and by Rs. 3,000,000 during the year of 2017. The non-controlling shareholders have been
valued at the fair value.
5) B Ltd has sold Rs. 60,000,000 worth of goods to A Ltd during the year. And the
inventories arising out of the purchases made from B Ltd were Rs. 24,000,000 and Rs.
18,000,000 respectively as at 1st January 2019 and 31st December 2019.
You are required to prepare the consolidated statement of comprehensive income and the
consolidated statement of changes in equity for the year ending 31st December 2019.
Question 21:
The following comprehensive income statements were taken from Asha Ltd and Bosley Ltd
Rs.’000
Asha Ltd Bosley Ltd
Sales 80,000 65,000
Cost of Sales (36,000) (29,000)
Other Operating Income 8,000 6,000
Finance Cost (5,000) (3,800)
Taxation (1,000) (4,000)
Fair Value changes of available for sale financial assets 2,000 3,000
Revaluation of P.P.E 1,500 2,500

Rs.’000
A Ltd B Ltd
Bal/B/f as at 1/1/2019 14,000 18,000
Total Comprehensive income for the period 29,000 21,200
Bal/C/f 40,000 45,200
1. A Ltd acquired 80% of equity shares in B Ltd on 1st January 2016. When the retained
earnings of B Ltd were Rs. 10,000,000. The details of the acquisition are given below.
Rs.’000
Investments made by A Ltd Rs. 210,000
B Ltd’s share capital 1/1/2016 Rs. 160,000
General Reserves at 1/1/2016 Rs' 90,000
2. Fair values of almost all the assets were equal to the book values as of the acquisition
date except the following.
Rs.’000
Asset Book Value Fair Value
Land 50,000 70,000
Plant 40,000 60,000
The remaining life time of the plant was estimated to have 5 years from the acquisition date.
Plant depreciation is adjusted to cost of sales.
3. B Ltd also had an unrecorded intangible asset which had a fair value of Rs. 15,000,000/-
as at the acquisition date. The intangible asset had life time of 4 years from the date of
the acquisition. The land fair valued on the acquisition date was disposed of during
2012.
4. B Ltd started trading with A ltd soon after the acquisition. Rs. 60,000,000 worth of goods
were sold by B Ltd to A Ltd during the year. The goods have been marked up by 25% on
cost. Stock positions were respectively as at 1st January 2018 and 31st December 2018
were Rs. 8,000,000/- and Rs. 12,000,000/-.
5. Soon after the acquisition on 1st January 2017, A Ltd sold an office equipment which had
a book value of Rs. 15,000,000/- selling price was Rs. 20,000,000/-. Both companies
depreciate office equipment by 10% per annum on cost.
6. A Ltd provides a consultancy service to B Ltd and charges Rs. 2,000,000 as consultancy
fee for a year. This is included in other operating income of A Ltd and the administration
cost of B Ltd.

Question 22
Following income statements were taken from Allen Ltd and Berty Ltd for the year ending
31st December 2019.
Rs.’000
Allen Ltd Berty Ltd
Sales 610,000 490,000
Cost of Sales (305,000) (235,000)
Gross Profit 305,000 255,000
Finance Cost (22,000) (31,000)
Taxation (26,000) (15,000)
Translation difference of foreign 15,000 10,000
operation
Revaluation of assets 18,000 6,000
Cash flow hedging 10,000 4,000
Total comprehensive income 147,000 105,000
Rs.’000
A Ltd B Ltd
Retained earnings Bal 1/1/2019 196,000 65,000
Retained earnings for the year 104,000 85,000
Dividends (25,000) (20,000)
Retained earnings Bal 31/12/2019 275,000 130,000
1) A Ltd acquired 80% of equity shares and all debentures in B Ltd on 1st January 2017.
2) Details of the acquisitions are given as mentioned below.

Rs.’000
Cash consideration of the investment made on 1st January
2019. 420,000
Share capital of B Ltd as at 1/1/2017 300,000
Retained earnings of B as at 1/1/2017 35,000
10% debentures of B as at 1/1/2017 150,000
Unrecorded intangible assets on the acquisition date 30,000
3) The fair values of all the assets and liabilities of B Ltd were almost equal to the book
value on the acquisition date except for plants which had a fair value of Rs. 10,000,000 in
excess of the book value. The remaining number of years of the life time of the plant was
8 years and the depreciation of plants should be adjusted to cost of sales (Interest rate
10%)

4) The group amortizes the intangible assets over 6 years from the acquisition date.
5) A Ltd also agree to pay another Rs. 100,000,000/- on the condition that the post-
acquisition profits will be Rs. 100,000,000 or more for the post acquisition period ending
on 31st December 2019. A Ltd agreed to pay another Rs. 80,000,000 to the previous
owners of B Ltd on 31st December 2014.
6) Goodwill impairment was Rs. 10,000,000 prior to 1st January 2019 and Rs. 5,000,000 for
the year ending 31st December 2019.
7) B Ltd has provided for debenture interest for the year ending 31st December 2019 and is
included in accrued expenses. However, A Ltd has still not recognized debenture
interest income as yet.
8) B Ltd sold Rs. 15,000,000 worth on an asset to A Ltd on 1 st January 2018 for Rs.
20,000,000. The remaining life time of the asset was 5 years as at 1 st January 2018.
9) B Ltd started trading with A Ltd, B Ltd marks up the goods by 1/3 rd on cost in invoicing
the goods to A Ltd, B Ltd has traded Rs. 90,000,000 worth of goods during the year to A
Ltd. Inventories were Rs. 27,000,000 and Rs. 45,000,000 respectively as at 1 st January 2019
and 31st December 2019.
December 2019.

Part IV – MISCELLANEOUS EXERCISES
Question 01:
Big PLC has invested in two entities, Medium PLC and Small PLC. The statement of
financial position of the three companies as at 31 March 2020 was as follows.
Assets Big PLC Medium PLC Small PLC

Non-Current Assets Rs.’000 Rs.’000 Rs.’000
Property, Plant & Equipment 200,000 180,000 130,000
Intangible Assets 50,000 15,000 -
Investments 265,000 - -
515,000 195,000 130,000
Current Assets
Inventories 85,000 42,000 30,000
Trade and Other Receivables 38,000 28,000 25,000
Cash & Cash Equivalents 22,000 10,000 8,000
145,000 80,000 63,000
660,000 275,000 193,000
Equity
Stated Capital 200,000 100,000 80,000
Retained Earnings 170,000 48,000 8,000
370,000 148,000 88,000
Non-Current Liabilities
Long Term Borrowings 170,000 75,000 55,000
Contingent Consideration 30,000 - -
200,000 75,000 55,000
Current Liabilities
Trade & Other Payables 41,000 30,000 24,000
Short Term Borrowings 49,000 22,000 26,000
90,000 52,000 50,000
660,000 275,000 193,000
The following additional information is also available to you.
1) On 1 April 2019, Big PLC acquired 80% stake of Medium PLC (8 million shares out of the
10 million shares of Medium PLC) for a cash payment of Rs.150 million. It was further
agreed that a further payment of Rs. 5 per share will be made to the previous
shareholders of Medium PLC on 1 April 2022 provided the profits of Medium PLC
exceed Rs. 20 million per annum over a period of three years starting from year ended 31
March 2020. On 1 April 2019 the fair value of this potential additional payment was Rs.
30 million. The investment of Big PLC includes Rs. 30 million in respect of this potential
further payment.

The fair value of the contingent consideration has been increased to Rs. 35 million as at 31
March 2020 due to changes in circumstances since the date of acquisition.
It is the policy of Big PLC to value the non-controlling interest in subsidiaries at the date
of acquisition at fair value. The fair value of an equity share in Medium PLC as at 1 April
2019 was Rs. 25.
2) The financial statements of Medium PLC showed a retained earnings balance of Rs. 23
million as at 1 April 2019.
3) The directors of Big PLC carried out a fair value exercise to measure the identifiable
assets and liabilities of Medium PLC as at 1 April 2019. The following were noted in this
exercise.
a. A property having a carrying value of Rs. 80 million as at 1 April 2019 includes a

depreciable amount of Rs. 50 million. This property had a fair value of Rs. 100
million (1 April 2019) of which Rs. 60 million was depreciable. The remaining
estimated future economic life of the depreciable amount of the property as at 1
April 2019 was 20 years. This property was still held by Medium PLC as at 31
March 2020.
b. Part of the inventories held by Medium PLC having a carrying value of Rs.15
million had a market value of Rs. 18 million. Medium PLC sold this inventory
during the financial year 2019/2020.
c. An intangible asset that had a fair value of Rs.10 million was not recognized by
Medium PLC since it was an internally developed asset. The useful life of this asset
was estimated as 10 years from 1 April 2019.
The fair value adjustments have not been reflected in the separate financial statements of
Medium PLC.
4) Big PLC acquired 60% stake of Small PLC (4.8 million shares out of 8 million shares) on 1
January 2020, for a cash payment of Rs. 60 million. The acquisition was a strategic
decision made by the Board of Directors of Big PLC. The Board of Directors of Small PLC
consists of five directors out of whom two directors have been appointed by Big PLC. The
fair value of the net assets of Small PLC as at 1 January 2020 was equal to their carrying
amounts. The net profit earned by Small PLC for the year ended 31 March 2020 was Rs.
4.8 million, and you may assume that this profit has accrued evenly throughout the year.
Small PLC did not pay any dividend during the year.

5) The directors of Big PLC identified that Medium PLC comprised three cash generating
units and decided to allocate goodwill arising on consolidation/acquisition equally
among each unit. During the year ended 31 March 2020 two of the three cash generating
units performed well and no impairment of goodwill was allocated to these units.
However the performance of the other unit was below expectation. Assets valued at Rs.
70 million as at 1 April 2019 (after fair value adjustment, without goodwill) were
allocated to this unit.
The recoverable amount of these assets in the unit was estimated at Rs. 65 million.
There were no additions to property, plant and equipment of Medium PLC during the
financial year 2019/2020
6) Big PLC invested Rs. 25 million in equity shares of Tiny PLC on 1 January 2020. This
investment does not give Big PLC sole control, joint control or significant influence over
Tiny PLC. This investment was classified as available for sale financial asset and the fair
value of this investment as at 31 March 2020 was Rs. 30 million.
7) On 1 April 2019 Big PLC entered into a leasing contract with Rajarata PLC and leased out
a plant to be used in the factory of the company. The lease was for a period of five years
and the economic life time of the plant is eight years. The lease rentals are payables at Rs.
25 million annually in advance at the end of each year. The rate of interest implicit in the
lease was 14% per annum. Fair value of the asset at the inception of the lease was Rs. 110
million.
Lease rental paid during the year amounting to Rs. 25 million is shown under trade and
other receivables in the financial statements of the company. The company depreciates
plant at 20% per annum on straight line basis.
(Ignore deferred tax impact.)
You are required to;

Compute the goodwill arising on acquisition of Medium PLC.
Prepare the consolidated statement of financial position of Big PLC group as at 31 March
2020.
(Source:ICASL-SII-2013-JUNE-01)

Question No 02:
Universal Plc has invested in Galaxy Ltd, and Earth Ltd. The Statements of Financial
Position for the year ended 31 March 2020 are as follows.
Universal Galaxy Earth

Assets Rs. ‘000 Rs. ‘000 Rs. ‘000
Non-current assets
Property, plant and equipment 250,000 200,000 150,000
Investment 240,000 70,000 10,000
Total non-current assets 490,000 270,000 160,000
Current assets
Inventory 60,000 40,000 50,000
Trade receivable 120,000 30,000 20,000
Cash and cash equivalents 10,000 10,000 20,000
Total current assets 190,000 80,000 90,000
Total assets 680,000 350,000 250,000
Equity and Liability
Equity
Stated capital 150,000 120,000 100,000
Retained earnings 70,000 50,000 70,000
Other components of equity 20,000 10,000 10,000
240,000 180,000 180,000
Non-current liabilities
Provisions 80,000 50,000 30,000
Borrowings 250,000 50,000 10,000
Deferred tax 10,000 20,000 -
Total non-current liabilities 340,000 120,000 40,000
Current liabilities
Trade and other payables 60,000 30,000 20,000
Short term borrowings 40,000 20,000 10,000
Total current liabilities 100,000 50,000 30,000
Total equity and liabilities 680,000 350,000 250,000
On 1 April 2019, Universal acquired 8,000,000 shares of Galaxy by way of share exchange of
6 Universal shares for 8 Galaxy shares and has obtained control of Galaxy.
1. The market value of shares as of the date of exchange was as follow:

Universal – Rs. 40
Galaxy – Rs. 20
2. Universal has agreed to make an additional cash payment of Rs. 40.263 million to the
former shareholders of Galaxy in 5 years time. The market interest rate of a similar
instrument is 10%.
3. Universal’s accounting policy is to measure non-controlling interest at fair value at the

date of acquisition.

4. Investment in Galaxy is not recorded in the Universal books as yet.
5. As at 1 April 2019, Galaxy had 12,000,000 shares in issue and showed following reserve
balance:
Retained earnings Rs. 40 million
Other components of equity Rs. 5 million
6. Fair value exercise was carried out by directors of Universal Plc to measure the
identifiable assets and liabilities of Galaxy Ltd as at 1 April 2019 and following were
noted:
o Property that had a carrying value of Rs. 150 million was valued at fair value at
Rs. 170 million. The useful life of the depreciable amount is 10 years as at 01 April
2019 and it remains unchanged.
o Fair value adjustments are temporary differences and attract deferred tax at a rate
of 25%.
7. Internally generated intangible asset of Rs. 12 million as at 1 April 2019 has not been
recognized in the Galaxy books.
8. Universal has invested Rs. 200 million in Earth Ltd on 1 April 2019 and has acquired
8000 shares. Earth Ltd, had 10,000 shares in issue as of that date. Earth Ltd’s board of
directors consists of 7 members and Universal has the right to appoint 6 members.
Universal has classified this investment as an available for sale investment in its
separate financial statements.
9. On 1 April 2019, Earth Ltd showed following reserve balances in its separate financial
statements. There was no material difference in carrying value of the net assets of
Earth Ltd and the fair value of those net assets as at the date of the investment.
Retained earnings Rs. 50 million

Other components of equity Rs. 15 million
10. During the financial year Galaxy has sold 2 million units of production to Universal
and Universal in turn has sold 50% of the units to final customers and balance is still in
the Universal inventory. Galaxy sells a unit at Rs. 20 to Universal and cost of a unit to
Galaxy is Rs.13.
11. Trade receivable of Universal include Rs. 12 million receivables from Earth and from
Galaxy Rs. 10 million. Earth has trade payable of Rs. 15 million to Galaxy.
Prepare consolidated statement of financial position of Universal Plc as at 31 March 2020.

(Source: ICASL-SII-2013-DEC)

Question No 03:
Following financial statements are given to you for Aradhana PLC and Bhagya PLC.
Rs.’000
Aradhana Ltd Bhagya Ltd
Revenue 100,000 90,000
Cost of Sales (40,000) (45,000)
Finance Cost (8,000) (3,000)
Taxation (7,000) (6,000)
Other Comprehension
Revaluation of P.P.A 6,000 7,000
Available for sat F/A 4,000 5,000
Aradhana Ltd Equity Statement

Rs’000
S/Cap R/E R/Val Av.S.AA. Total
Balance 1/1/2019 20,000 28,000 4,000 2,000 54,000
Total Comprehensive Income 32,000 6,000 4,000 42,000
Bal. 31/12/2019 20,000 60,000 10,000 6,000 96,000
Bhagya Ltd Equity Statement

Rs’000
S/Cap R/E R/Val Av.S.AA. Total
Balance 1/1/2019 15,000 57,000 3,000 2,000 77,000
Bal. 31/12/2019 15,000 80,000 10,000 7,000 112,000
Balance Sheet as at 31/12/2019

Rs’000
A Ltd B Ltd
Property, Plant, Equipment 200,000 180,000
Available for sale F/A 50,000 60,000
Investment in B Ltd 120,000
Investment in C Ltd 80,000
Current Assets
Inventories 15,000 20,000
T/Receivables 20,000 12,000
Cash and Bank 5,000 28,000
490,000 300,000
S/Capital 20,000 15,000
Retained Earnings 60,000 80,000

Revaluation Reserve 10,000 10,000
Afa. for Sale F/A 6,000 7,000
96,000 112,000
N.C.C 200,000 150,000
C.L 194,000 38,000
490,000 300,000
Following additional information is given.
A Ltd acquired 80% of equity shares, when the equity of B Ltd was as follows on 1/1/2017.
Available for sale financial Assets 1,000,000
Revaluation Reserve 1,000,000
You are required to prepare consolidated comprehensive income statements and the
statements of changes in equity for the year ending 31/12/2019 and the consolidated
statement of financial position as at 31/12/2019.
Question No 04:
Comprehensive income statements of A and B Ltd for year ended 31/12/2019.
Rs.’000
A Ltd B Ltd
Sales 260,000 220,000
Cost of Sales (130,000) (70,000)
Gross Profit 130,000 150,000
Other operating Income 30,000 35,000
Finance Cost (3,000) (4,000)
Taxation (9,000) (12,000)
Other Comprehensive income
Revaluation of P.P.E 8,000 6,000
Cash flow hedges 3,000 4,000
Total comprehensive income 95,000 136,000
A Ltd Equity Statement

Rs’000
Cash
S/Cap R/E R/Val flow Total
hedges
Balance 1/1/2019 200,000 115,000 14,000 17,000 346,000
Dividends (15,000) (15,000)
Bal. 31/12/2019 200,000 184,000 22,000 20,000 426,000

B Ltd Equity Statement
Rs’000
S/Cap R/E R/Val C/F/H Total
Balance 1/1/2019 150,000 114,000 9,000 16,000 289,000
Dividends (20,000) (20,000)
Bal. 31/12/2019 150,000 220,000 15,000 20,000 405,000
Statements of Financial Position as at 31/12/2019

Rs’000
A Ltd B Ltd
P.P.E 200,000 320,000
Investments in B Ltd 180,000
Investments in C Ltd 180,000
Available for sale F/A 90,000 160,000
Current Assets
Trade Receivables 75,000 53,000
Dividend Receivable 20,000
920,000 650,000
Stated Capital Rs. 1 rupee 200,000 150,000
Revaluation Reserves 22,000 15,000
Cash flow hedges 20,000 20,000
Bank Loans 25,000 80,000
Debentures 100,000 60,000
Current Liabilities
Dividends payable 15,000 20,000
Bank OD 22,000 32,000
920,000 650,000

1. A Ltd acquired 80% of equity shares of B Ltd on 1st January 2017 when the equity items
were appearing as follows.
Retained Earning 55,000,000
Cash flow hedges 10,000,000
Unrecognized intangible assets at fair value Rs. 50,000,000 and the asset had a 5 years
remaining life time as of the acquisition date.
Fair value of the non-controlling shareholders as of the acquisition date was Rs. 60,000,000/-
2. The fair values of all most all the assets of B Ltd were equal to the book values as of the
acquisition date except for one plant of which fair values were higher by Rs. 30,000,000

than its recorded book values and the remaining life time of the asset was 5 years as of
the acquisition date. Depreciation of plants are adjusted to cost of sales.
3. A Ltd, as of the acquisition date, paid 1.5/- per every share acquired and agree to pay
another 30,000,000/- on 31/12/2019 and the cost of capital to be taken as 10% per
annum. Only the cash consideration of the investment is recorded.
4. A Ltd had sold Rs. 40,000,000/- worth of goods to B Ltd during the year and B Ltd is
holding Rs. 30,000,000 worth of goods as at the reporting date. A Ltd marks-up the
goods by 50% on cost.
You are required to prepare the consolidated financial statements of A Ltd group for the
year ended 31/12/2019.

Part V – MIXED EXERCISES
Question 01
Alpha holds investments in Beta and Gamma. The statements of financial position of the
three entities at 30 September 2019 were as follows:
Alpha Beta Gamma

ASSETS $’000 $’000 $’000
Non-current assets:
Property, plant and equipment 210,000 165,000 120,000
(Note 1) Investments:
– in Beta (Note 1) 180,000 Nil Nil
– in Gamma (Note 3) 78,000 Nil Nil
– in Sigma (Note 6) 15,000 Nil Nil
483,000 165,000 120,000
Current assets:
Inventories (Note 4) 65,000 36,000 29,000
Trade receivables (Note 5) 55,000 38,000 35,000
Cash and cash equivalents 12,000 7,000 9,000
132,000 81,000 73,000
Total assets 615,000 246,000 193,000
EQUITY AND LIABILITIES
Equity
Share capital ($1 shares) 180,000 100,000 60,000
Other components of equity 90,000 5,000 Nil
Total equity 453,000 172,000 124,000
Non-current liabilities:
Contingent consideration (Note 1) 20,000 Nil Nil
Long-term borrowings (Note 8) 50,000 35,000 30,000
Deferred tax 15,000 9,000 12,000
Total non-current liabilities 85,000 44,000 42,000
Current liabilities:
Trade and other payables 50,000 23,000 21,000
Short term borrowings 27,000 7,000 6,000
Total current liabilities 67,000 30,000 27,000

Note 1 – Alpha’s investment in Beta
On 1 April 2018 Alpha acquired 80 million shares in Beta by means of a share exchange.
Alpha issued one share for every two shares acquired in Beta. On 1 April 2018 the market
value of an Alpha share was $4 and the market value of a Beta share was $1·80. The terms of
the business combination provide for an additional cash payment to the former shareholders
of Beta on 30 June 2020 based on its post-acquisition financial performance in the first two
years since acquisition. The fair value of this additional payment was $20 million on 1 April
2018 The post-acquisition performance of Beta was such that the fair value of this payment
had increased to $22 million by 30 September 2019. The investment in Beta and the non-
current liabilities of Alpha at 30 September 2018 include $20 million in respect of the
additional payment due to be made on 30 June 2020.
On 1 April 2018 the individual financial statements of Beta showed the following reserves
balances:
 Retained earnings $41 million.
 Other components of equity $3 million.
The directors of Alpha carried out a fair value exercise to measure the identifiable assets and
liabilities of Beta at 1 April 2018. The following matters emerged:
 A property, having a carrying amount of $50 million (depreciable amount $30

million), had a fair value of $70 million (depreciable amount $33 million). The
estimated future economic life of the depreciable amount of the property at 1 April
2018 was 30 years. This property was still held by Beta at 30 September 2019.
 Plant and equipment, having a carrying amount of $60 million, had an

estimated market value of $64 million. The estimated future economic life of the
plant at 1 April 2018 was four years. This plant was still held by Beta at 30
September 2019.
 Inventory, having a carrying amount of $30 million, had an estimated market

value of $31 million. All of this inventory had been sold since 1 April 2018.
The fair value adjustments have not been reflected in the individual financial statements of
Beta. In the consolidated financial statements, the fair value adjustments will be regarded as
temporary differences for the purposes of computing deferred tax. The rate of tax to apply to
temporary differences (where required but see notes 3, 4, 6 and 7 below) is 20%.

It is the group policy to value the non-controlling interest in subsidiaries at the date of
acquisition at fair value. The fair value of an equity share in Beta at 1 April 2018 can be used
for this purpose.
Note 2 – Impairment reviews – Beta
On 1 April 2018 the directors of Alpha identified that Beta comprised five cash-generating
units and allocated the goodwill arising on acquisition equally across each unit. No
impairment of goodwill was apparent in the year ended 30 September 2018.
During the year ended 30 September 2019 four of the five cash-generating units performed
very satisfactorily and no impairment of the goodwill allocated to these units had occurred.
However the performance of the other unit was below expectations. During the impairment
review carried out at 30 September 2019 assets (excluding goodwill) having a carrying
amount in the consolidated financial statements of $50 million were allocated to this unit.
The recoverable amount of these assets was estimated at $52 million.
Note 3 – Alpha’s investment in Gamma
On 1 October 2018 Alpha paid $78 million for 60% of the equity shares of Gamma. The
retained earnings of Gamma on 1 October 2018 were $60 million. You can ignore any
deferred taxation implications of the investment by Alpha in Gamma. The investment in
Gamma has not suffered any impairment since 1 October 2018.
Note 4 – Inter-company sale of inventories
The inventories of Beta and Gamma at 30 September 2019 included components purchased
from Alpha during the year at a cost of $16 million to Beta and $10 million to Gamma. Alpha
generated a gross profit margin of 25% on the supply of these components. You can ignore
any deferred tax implications of the information in this note.
Note 5 – Trade receivables and payables
The trade receivables of Alpha included $5 million receivable from Beta and $4 million
receivable from Gamma in respect of the purchase of components (see Note 4). The trade
payables of Beta and Gamma included equivalent amounts payable to Alpha.
Note 6 – Alpha’s investment in Sigma
Alpha’s investment in Sigma does not give Alpha sole control, joint control or significant
influence. The investment was purchased on 1 January 2019 for $15 million. The investment
was classified as fair value through other comprehensive income. The fair value of the
investment in Sigma on 30 September 2019 was $16 million. In the tax jurisdiction in which

Alpha is located unrealised profits on the revaluation of equity investments are not subject
to current tax. Any such profits are taxed only when the investment is sold.
Note 7 – Modification of vehicles
On 1 January 2019 legislation was passed requiring Alpha to carry out modifications to its
motor vehicles to enable harmful emissions to be reduced. The modifications should have
been completed by 30 June 2019 at an estimated cost to Alpha of $3 million. In fact by 30
September 2019 none of the vehicles had been modified although they continued to be used.
It is likely that Alpha will be fined $500,000 per month for the illegal use of the vehicles. The
directors of Alpha are uncertain exactly when they will carry out the modifications but they
intend to do so sometime during the year ended 30 September 2018. They expect that a fine
will become payable very shortly as legal action has commenced against Alpha.
Required:
Prepare the consolidated statement of financial position of Alpha at 30 September 2019.
(ACCA-DipIFR-2011-Dec-Q.01)
Question 02
The income statements and summarized statements of changes in equity of Alpha, Beta
and Gamma for the year ended 31 March 2020 are given below:
Income Statements
Alpha Beta Gamma

$’000 $’000 $’000
Revenue 150,000 100,000 96,000
Cost of sales (110,000) (78,000) (66,000)
Gross profit 40,000 22,000 30,000
Distribution costs (7,000) (6,000) (6,000)
Administrative expenses (8,000) (7,000) (7,200)
Profit from operations 25,000 9,000 16,800
Investment income 5,000 500 500
Finance cost (4,000) (3,000) (3,200)
Profit before tax 26,000 6,500 14,100
Income tax expense (7,000) (1,800) (3,600)
Net profit for the period 19,000 4,700 10,500
Summarised Statements of Changes in Equity

Balance at 1 April 2019 122,000 91,000 82,000
Net profit for the period 19,000 4,700 10,500
Dividends paid on 31 January 2020 (6,500) (3,000) (5,000)
Balance at 31 March 2020 134,500 92,700 87,500

Note 1 – purchase of shares in Beta
On 1 October 2017 Alpha purchased an 80% equity shareholding in Beta. The equity of Beta
as shown in its own financial statements at that date was $32 million.
Alpha issued 20 million shares to the former shareholders of Beta in exchange for the shares
purchased. The market value of Alpha’s shares on 1 October 2017 was $2.
At the date of acquisition Beta owned a property with a book value of $28 million and a
market value of $35 million. Beta had purchased the property for $30 million on 1 October
2012 and estimated that the depreciable amount of the property (the buildings element) was
$16 million at 1 October 2012. The estimated useful economic life of the building at 1 October
2012 was 40 years.
The directors of Alpha estimated that the buildings element of the property comprised 50%
of its market value at 1 October 2017. They considered that the original estimate of the total
useful economic life of the buildings element (40 years from 1 October 2012) was still valid.
At 1 October 2017 the plant of Beta had a book value of $12 million and a market value of
$15 million. The plant is depreciated on a straight line basis and the remaining useful
economic life of the plant at 1 October 2017 was estimated at five years.
All depreciation is charged on a monthly basis and presented in cost of sales. No

adjustments were made to the individual financial statements of Beta to reflect the
information given in this note.
Note 2 – purchase of shares in Gamma
On 1 July 2019 Alpha purchased 55% of the equity shares of Gamma. This purchase allowed
Alpha to exercise a significant influence over Gamma, but Alpha was not able to control its
operating and financial policies. No material differences between the market value and the
book value of the net assets of Gamma was apparent at the date of the share purchase.
Note 3 – impairment reviews
An impairment review at 31 March 2020 indicated that 25% of the goodwill on acquisition of
Beta needed to be written off. Apart from this, no other impairments of goodwill on
acquisition of Beta have been required.
No impairment of the investment in Gamma has yet been necessary.
All impairments are charged to cost of sales.

Note 4 – inter-company sales
Alpha supplies products used by Beta and Gamma. Sales of the products to Beta and
Gamma during the year ended 31 March 2020 were as follows (all sales were made at a
markup of 25% on cost):
- Sales to Beta $12·5 million.
- Sales to Gamma (all in the post-acquisition period) $4 million.
At 31 March 2020 and 31 March 2019 the inventories of Beta and Gamma included the
following amounts in respect of goods purchased from Alpha.
Amount in inventory at
31 March 2020 31 March 2019
$’000 $’000
Beta 3,000 1,600
Gamma 2,000 Nil
Note 5 – dividend payments
The dividend received from Gamma on 31 January 2020 was credited to the income
statement of Alpha as investment income as the post-acquisition profits of Gamma were in
excess of the dividend received.
Required:
- Prepare the consolidated income statement for Alpha for the year ended 31 March
2020.
- Prepare the summarized consolidated statement of changes in equity for Alpha for
the year ended 31 March 2020.
Note: ignore deferred tax. (ACCA-DipIFR-2011-Dec-Q.01)
Question 03
On 01.01.2018 Solar PLC, 75% of the equity shares of Lunar Inc when the retained earning
balance of the latter stood at L$ 1 million.
Accounting year of both companies ends on June 30th of each year.
The summarized financial statements of the two companies are as follows:
Balance Sheet as at 30.06.2019

Assets Solar PLC (Rs. '000) Lunar INC (Rs '000)
Non-current Assets
Property, Plant & Equipment 7,365 6,780
Investments in Lunar INC 6,075
Current Assets

Trade & other receivables 1,800 2,640
Cash & cash equivalents 560 2,400
18,000 15,000
Equity
Stated capital/equity capital 8,000 3,000
Revaluation reserve 100 -
12% borrowings - 3,000
Current Liabilities
Trade & other payables 1,950 1,980
18,000 15,000
Summarized Income Statement for the year ended 30.06.2019
Solar PLC (Rs. '000) Lunar INC
(Rs '000)
Revenue 40,400 39,600
Cost of sales 28,200 23,400
Gross profit 12,200 16,200
Other income 428 300
Operating expenses including finance cost (7,848) (11,700)
Profit before tax 4,780 4,800
Income tax expenses 1,420 2,280
Net Profit for the year 3,360 2,520
Summarized Statement of changes in Retained Earnings

Solar PLC (Rs. '000) Lunar INC (Rs '000)
Balance on 01.07.2018 5,390 4,980

Net Profit for the year 3,360 2,520
Dividends paid (800) (480)
Balance on 30.06.2019 7,950 7,020
Following information is available:

Solar PLC's Investment account is made up as follows:
Rs. '000
01.01.2018 - Equity shares (75%) = 5,250
01.07.2018 - 10% Borrowings by Lunar Inc = 825
6,075
Fair value of identifiable net assets of Lunar Inc as on 01.01.2018 was Rs.6.6 million. The
reason for the difference between book value and fair value of the identifiable net assets of
Lunar Inc was due to the change in the fair value of its land.

1) On 01.07.2018, Lunar Inc. sold a plant to Solar PLC for Rs. 1,350,000. On this deal Lunar
Inc earned a profit margin of 20% on net book value as at that date. Both companies
depreciate plants at 20% per annum.
2) During the year ended 30.06.2019, Solar PLC sold trading goods costing Rs. 1.5 million to
Lunar Inc at a profit margin of 20% on cost. 30% of these goods were included in the
closing stocks of Lunar Inc as at 30.06.2019.
3) Rs. 600,000 remitted by Lunar Inc to Solar PLC on 30.06.2019 being final settlement of
balance due to the latter was received and accounted for only on 4.7.2019.
4) A plant of Solar PLC was tested for impairment on 30.06.2019 and the observations were
as follows:
Carrying value Rs. 2.64 million
Value in use Rs. 2.50 million
Fair value less costs to sell Rs. 2.45 million
5) Other income of Solar PLC comprised of the following.
Rs. '000
Interest on loan given to Lunar Inc 68
Dividend received from Lunar Inc 360
428
You are required to prepare;
- A statement showing goodwill on consolidation.
- Consolidated Balance Sheet of Solar PLC and its subsidiary as at 30.06.2019
- Consolidated Income Statement of the group for the year ended 30.06.2019. (Show all
your workings clearly.)

Part VI - ASSOCIATES
Equity Method of Accounting

Under the equity method of accounting
1. Investment in an associate in initially recognized at cost.
2. Investment is increased or decreased to recognize the investor’s share of profit or loss of
the investee after the date of acquisition.
3. Distributions (Dividends) received from the investee reduce the carrying amount of the
investment'
4. Carrying amount of the investment is also adjusted for the proportionate interest in the
investee arising from the changes in the investee’s other comprehensive income. (Ex.
Revaluation of property plant and equipment, Translation difference of foreign
operations of the investee, Cash flow hedges)
5. The investor’s share of those changes is recognized in other comprehensive income of
the investor.
Equity Method is Not Used When

1. The investment is classified as held for sale in accordance with SLFRS 05 non-current
assets held for sale and discontinued operations.
2. The investor itself is a subsidiary, its owners do not object to the equity method not
being applied and its debts and equity securities are not publicly traded. In this case, the
investor’s parent must present consolidated financial statements that do use the equity
method.
Carrying value of the investment in associate is determined as follows.
Investment in associate xxx

Add: Share of increase in net assets xx
Less: Impairment losses (xx)
Carrying value of the investment in associate xxx
This is shown in the Non-current assets section of the statement of financial position.
Note that SLFRS – 03 does not apply to associate as they are not under the control of the
investing entity.
You will need to produce another working to calculate the share of the increase in net assets
(Post – Acquisition retained earnings)
Income Statement
Include the group’s share of the associate’s (Profit after tax less any impairment losses.)
Intercompany Transactions
Remember that you do not eliminate intercompany sales and purchases, receivables or
payables between the group and the associate as the associate is outside the group. The only
exception to this is any unrealized profit on transactions of which the group’s share only
must be eliminated.

Fair Value Adjustment
Fair value adjustments relating to an associate are included in the net assets as normal.
However, you do not include any fair value adjustments relating to an associate within the
various net assets on the group statement of financial position. As seen already, there is one
amount for the carrying value of the interest in the associate on the group statement of
financial position.
Accounting Policies of the Associate
When the accounting policies adopted by the associate company are different from those of
the investor, adjustments are required to confirm the associate’s accounting policies to those
of the investor.
Future Losses of the Associate
Losses of the associate company are recognized by the investor only up to the extent of the
investment account balance becomes zero. Any further losses of the associate will be
recognized by the investor only if the investor has directly a constructive or legal obligation.
If the associate subsequently reports profits the investor, resumes recognizing its share of
those profits only after its share of profits equals the share of losses not recognized.
Impairment Losses
The goodwill of the associate is not separated out and is inbuilt into the investment itself.
Thus, the goodwill arising on the acquisition of an associate is not tested for impairments
applying the requirements of (LKAS 31) instead the entire carrying amount of the
investment is tested for impairment in accordance with LKAS 36 as a single asset.
General Points and Disclosures

a. Inter-company transactions and balances cannot be cancelled, because the associate’s
side of any balance is only shown as a share of a net amount, loans from the investor to
the associate will be presented alongside the investment in the associate and other
significant transactions and balanced should be disclosed.
b. Allowances for unrealized, profit only the group share of any allowance for unrealized
profits will be accounted for (unrealized profits in subsidiaries is eliminated in full) the
allowance will be recognized in the statement of financial position as follows.
i. Inventory held by the investor reduce the value of the inventories.

ii. Inventory held by the associate reduce the value of the associate.
c. Reporting Date: The financial statements used to consolidate the associate should be
drawn up to the investor’s reporting date. Because the investor does not control the
associate it may not be possible to change the year end and so interim accounts would
have to be used. If this is not possible; then the most recent accounts are used, as long as
the difference in reporting dates is no more than three months.
d. Accounting Policies – These should be harmonized.
e. Contingencies – The investor should disclose its share of contingencies. It should also
disclose any of the associate’s liabilities that it is contingently liable for (e.g. guaranteeing
an overdraft)
f. Descriptions – A list and a description of significant associates should be disclosed. This

will note the ownership interests, voting interests, and consolidation method for each
associate.

Exercise – 01
The following statements of financial position were taken from Amantha Limited and Bimal
Limited as at 31st December 2019.
Rs. ‘000
A Ltd B Ltd
Current Assets
540,000 290,000
Share Capital 300,000 100,000
10% Debentures 60,000 45,000
Current Liabilities
Trade Payables 25,000 33,000
Bank O/D 75,000 37,000
540,000 290,000
A Ltd acquired 40% equity shares in B Ltd on 1st January 2017 when B Ltd’s retained
earnings were Rs. 60,000.
You are required to prepare the statement of financial position as at 31st December 2019.
Dividend Adjustment
Distributions (Dividends) from the associate companies reduce the carrying value of the
investment.
The dividends from the associate company to the investor can be recognized in two different
ways as follows.
1. Dr. Cash/Dividend receivable

Cr. Investment Account
If the investor recognizes dividends from the associate as shown above, the investor should
recognize its share of associate post acquisition profit from the profit after tax figure.
2. Dr. Cash/Dividend receivable

Cr. Retained earnings of the investor/consolidated reserves
If the investor recognizes dividends from the associate as per the second method, the
investor should recognize its share of associate post acquisition profit form the profit after
dividends.

Exercise – 02
The following statement of financial position was taken from Amal Ltd and Bhatiya Ltd as
at 31st December 2019.
Rs. ‘000
A Ltd B Ltd
Less: Depreciation (20,000) (10,000)
Current Assets
130,000 90,000
Share capital 50,000 30,000
Non-current Liabilities 5,000 10,000
Current Liabilities
Dividends 2,000 8,000
130,000 90,000
i. A Ltd acquired 25% of equity shares in B Ltd on 1st January 2017 when its retained
earnings were Rs. 10,000/=.
ii. The proposed dividends in both companies are out of the profits 2019.
You are required to prepare the statement of financial position as at 31 st December 2019.
Elimination of Unrealized profits resulting due to intercompany trading between the

investor and the associate.
1. Determine the value of inventories resulting from the intercompany trading between the
investor and the associate company.
2. Calculate the unrealized profit loaded in the closing inventory.
Value of Inventory *Profit

Cost + Profit
3. Record only the investor’s share of unrealized profits as mentioned below.
Dr. Retained earnings/consolidated reserves

Cr. Investment
(Where the selling company is the investor and buying company is the associate)
Dr. Retained earnings/consolidated reserves

Cr. Inventories
(Where the selling company is the associate and buying company is the investor)

Exercise – 03
Rs. ‘000
A Ltd B Ltd C Ltd
Less: Acc. Depreciation (600) (400) (300)
Written down value 2,200 1,200 900
Investment in C Ltd 400
Current Assets
Inventories 1,640 1,280 304
Trade Receivables 1,800 750 290
Cash and Bank 95 160 55
7,635 3,390 1,549
Share capital 2,400 900 800
Retained Earnings 3,000 1,200 440
Current Liabilities 1,720 920 260
Taxation 275 220 25
Proposed Dividends 240 150 24
7,635 3,390 1,549
1. A Ltd acquired 2/3rd of equity share capital of B Ltd on 1st January 2016 when the
retained earnings of B Ltd were Rs. 360. A Ltd also acquired 25% of equity shares in C
Ltd when the retained earnings of C Ltd were Rs. 300/=
2. Included in C Ltd’s stocks on 31st December 2019 are goods purchased from A Ltd for Rs.
150. A Ltd keeps a profit markup of 50% on cost when the goods are invoiced to A Ltd.
3. Included in trade receivables of A are Rs. 120 due from B Ltd and Rs. 35 due from C Ltd.
4. The above statements of financial positions are given as at 31/12/2019.

31/12/2019.
Exercise – 04
Below are the statements of financial position of three companies as at 31 st December 2019.
Rs. ‘000
D Ltd L Ltd P Ltd
Non-current Assets
Property, Plant & Equipment 1,120 980 840
Investments
672,000 Shares in L Ltd 644 - -
168,000 Shares in P Ltd 224
1,988 980 840

Current Assets
Inventory 380 640 190
Receivables 190 310 100
Bank 35 58 46
605 1,008 336
2,593 1,988 1,176
Equity
Rs. 1/= Ordinary Shares 1,120 840 560
Retained Earnings 1,232 602 448
2,352 1,442 1,008
Current Liabilities
Trade Payables 150 480 136
Taxation 91 66 32
241 546 168
2,593 1,988 1,176
You are also given the following information.
1. D Ltd acquired its shares in L Ltd on 1st January 2019. When L Ltd’s retained losses were
Rs. 56,000.
2. D Ltd acquired its shares in P Ltd on 1st January 2019. When P Ltd had retained earnings
of Rs. 140,000/=.
3. An impairment test at the yea end shows that goodwill for L Ltd remains unimpaired
but the investment in P has impaired by Rs. 2,800.
4. The D group values the non-controlling interest using the fair value method. The fair
value on 1st January 2019 was Rs. 160,000/=
Prepare the consolidated statement of financial position.
Exercise – 05
On 1st April 2018 ‘P’ Ltd acquired the following non-current investments.
6 Million equity shares in S Ltd by an exchange of two shares in ‘P’ Ltd for every four shares
in S Ltd plus Rs. 1.25/= per acquired shares in S Ltd. The market price of each P Ltd share at
the date of acquisition was Rs. 6 and the market price of each S Ltd share at the date of
acquisition was Rs. 3.25.
30% of the equity shares of A Ltd at cost of Rs. 7.50 per share in cash.
Only the cash considerations of the above investments have been recorded by P Ltd. In
addition, Rs. 1,000,000 professional costs relating to the acquisition of S Ltd is also included
in the cost of the investment.
The summarized draft statements of financial position of the three companies at 31st March
2019 are given below.

Rs. ‘000
P Ltd S Ltd A Ltd
Assets
Non-current Assets
Investments in S & A Ltd’s 26,500 - -
Held for trading investments 13,000 - -
76,300 20,800 36,000
Current Assets
Inventory 13,800 12,400 7,200
Trade Receivables 6,400 3,000 4,800
Equity & Liabilities 96,500 36,200 48,000
Equity shares of Rs. 1 each 20,000 8,000 8,000
Retained Earnings
31st March 2018 32,000 12,000 22,000
For the year ended 31/03/2019 18,500 5,800 10,000
70,500 25,800 40,000
7% Loan notes 10,000 2,000 2,000
Current Liabilities 16,000 8,400 6,000
26,000 10,400 8,000
96,500 36,200 48,000
The following information is relevant
1. At the date of acquisition S Ltd had on internally generated brand name. The directors of
P Ltd estimate that the value of this brand name has a fair value of Rs. 2 mil an indefinite
life and has not suffered any impairment.
2. On 1st April 2018 P Ltd sold an item of plant to S Ltd at its agreed fair value of Rs. 5
million. Its carrying amount prior to the sale was Rs. 4 million. The estimated remaining
life of the plant at the date of sale was 5 years. (straight line depreciation)
3. During the year ended 31st March 2019 S Ltd sold goods to P Ltd for Rs. 5.4 million. S Ltd
had marked up these goods by 50% on cost. P Ltd had a third of the goods still in its
inventory at 31st March 2019. There were no intra-group payables/receivables at 31st
March 2019.
4. P Ltd has a policy of valuing non-controlling interests at fair value at the date of
acquisition. For this purpose, the share price of S Ltd at this date should be used.
Impairment tests on 31st March 2019. Concluded that neither consolidated goodwill or
the value of the investment in A Ltd have been impaired.
5. The held for trading investments are included in P Ltds statement of financial position at
their fair value on 1st April 2018. But they have fair value of Rs. 18 million at 31st March
2019.

6. No dividends were paid during the year by any of the companies.
Required: Prepare the consolidated statement of financial position for P Ltd as at 31 st March
2019.
Exercise 06
(Pilot Paper F1 ACCA International December 2008 Q No. 01)
On 1st October 2018 pumice acquired the following non-current investments.

- 80% of the equity shares of Silverton at a cost of Rs. 13.6 million
- 50% of Silvertons 10% loan notes at par.
- 1.6 million Equity shares in Amok at a cost of Rs. 6.25 each.
The summarized statements of financial positions of the three companies at 31st March 2019
are given below.
Rs. ‘000
Pumice Silverton Amok
Non-current Assets
Investments in S & A Ltd’s 26,000 -------- 1,500
46,000 8,500 18,000
Current Assets 15,000 12,000 11,000
Total Assets 61,000 20,500 29,000
Equity and Liabilities
Equity, equity shares Rs. 1/= 10,000 7,000 4,000
47,000 15,000 24,000
8% Loan note 4,000 - -
10% Loan note - 2,000 -
61,000 20,500 29,000
The following information is relevant.
1. The fair values of Silverton’s assets were equal to their carrying amounts with the
exception of land and plant. Silverton’s land had a fair value of Rs. 400,000 in excess of
tis carrying amount and plant had a fair value of Rs. 1.6 million in excess of its carrying
amount. The plant had a remaining life of four year (Straight-line depreciation) at the
date of acquisition.
2. In the post-acquisition period pumice sold goods to Silverton at a price of Rs. 6 million.
These goods had cost Pumice Rs. 4 million. Half of these goods were still in the
inventory of Silverton at 31st March 2019. Silverton had a balance of Rs. 1.5 million owing
to pumice at 31st March 2019 which agreed with the records of Pumice.
3. The net profit after tax for the year ended 31st March 2019 was Rs. 2 million for Silverton
and Rs. 8 million for Amok. Assume profits accrued evenly throughout the year.

4. An impairment test at 31st March 2019 concluded that consolidated goodwill was
impaired by Rs. 40,000 and the investment in Amok was impaired by Rs. 200,000.
You are required to prepare the consolidated statement of financial position as at 31st March
2019.
Exercise 07
(ACCA F7 – International – December 2007 – Q No. 01)
On 1st October 2018 Plateau acquired the following non-current investments.
3 million equity shares in Savannah by an exchange of one share in Plateau for every two
shares in Savannah plus Rs. 1/= per acquired Savannah share in cash. The market price of
each plateau share at the date of acquisition was Rs. 6/=.
30% of the equity shares of Axle at a cost of Rs. 7.50 per share in cash.
Only the cash consideration of the above investments has been recorded by plateau.
The summarized statements of financial positions are given as at 30 th September 2019.
Rs. ‘000
Plateau Savannah Axle
Assets
Non-Current Assets
Investments in S & A 12,000 - -
Available for sale investments 6,500 - -
36,900 10,400 18,000
Current Assets
Inventory 900 6,200 3,600
Total Assets 41,000 18,100 24,000
Equity Shares of Rs. 1/= each 10,000 4,000 4,000
Retained earnings 30/09/2018 16,000 6,500 11,000
for the year ended 20/09/2019 8,000 2,400 5,000
34,000 12,900 20,000
7% loan notes 5,000 1,000 1,000
The following information is relevant

1. At the date of acquisition the fair values of Savannah’s assets were equal to their
carrying amount the exception of Savannah’s land which had a fair value of Rs. 500
below its carrying amount. It was written down by this amount shortly after acquisition
and has not changed in value since then.

2. On 1st October 2018 Plateau sold an item of Plant to Savannah at tis agreed fair value of
Rs. 2.5 million. Its carrying amount prior to the sale was Rs. Million. The estimated
remaining life of the plant at the date of the sale was 5 years (straight line depreciation)
3. During the year ended 30th September 2019 Savannah sold goods to plateau for Rs. 2.7
million. Savannah had marked up these goods by 50% on cost. Plateau had a third of the
goods still its inventory at 30 September 2019. There were no intra-group
payables/receivables at 30 September 2019.
4. Impairment tests on 30th September 2019 concluded that the value of the investment in
Axle was not impaired but consolidated goodwill was impaired by Rs. 900,000.
5. The available for sale investments are included in plateau’s statement of financial
position at their fair value on 1st October 2018. But they have a fair value of Rs. 9 million
at 30th September 2019.
You are required to prepare the consolidated statement of financial position as at 30th
September 2019.
Associates in the Consolidated Income Statement
Equity Accounting
The equity method of accounting requires that the consolidated income statement.
 Does not include dividends from the associate.
 Instead includes group share of the associate’s profit before tax less any impairment of
the associate in the year.
Trading with Associate
Generally, the associate is considered to be outside the group.
Therefore, any sales or purchases between group companies and the associate are not
normally eliminated and will remain part of the consolidated figures in the comprehensive
income statement.
It is the normal practice to instead adjust for the unrealized profit in inventory.
Dividends from Associate

Dividends from associates are excluded from the consolidated comprehensive income
statement the group share of the associates profit is included instead.
Exercise 08
Following comprehensive income statements were taken from A Ltd, B Ltd, and C Ltd for
Rs. ‘000
A Ltd B Ltd C Ltd
Sales 150,000 120,000 80,000
Cost of Sales (40,000) (30,000) (20,000)

Gross Profit 110,000 90,000 60,000
Distribution Cost (15,000) (12,000) (10,000)
Administration Cost (30,000) (17,000) (13,000)
Finance Cost (14,000) (11,000) (8,000)
Profit Before Tax 51,000 50,000 29,000
Taxation (5,000) (6,000) (2,000)
Profit for the year 46,000 44,000 27,000
Cash flow hedging 10,000 12,000 14,000
Revaluation of Property, Plant
4,000 6,000 7,000
& Equipment
Total Comprehensive Income 60,000 62,000 48,000
Statement of Changes in Equity
A Ltd B Ltd C Ltd

R/E R/E R/E
Bal/B/F 1/1/2019 120,000 140,000 60,000
Profit for the year 46,000 44,000 27,000
Bal/C/F 31/12/2019 166,000 184,000 87,000
1. A Ltd acquired 80% of equity share capital of B Ltd on 1 st January 2017. When the
retained earnings of B Ltd were Rs. 100,000/=.
2. A Ltd also acquired 30% of C Ltd on 1st January 2018 when the retained earnings were
Rs. 30,000/=.
Exercise 09
Following Comprehensive income statements were taken from A Ltd. B Ltd and C Ltd for
Rs. ‘000
A Ltd B Ltd C Ltd
Sales 300,000 250,000 200,000
Cost of Sales (100,000) (75,000) (50,000)
Gross Profit 200,000 175,000 150,000
Finance Cost (30,000) (20,000) (40,000)
Profit Before Tax 100,000 100,000 80,000
Taxation 35,000 25,000 15,000
Fair value changes of for sale
16,000 14,000 10,000
financial assets
Cash flow hedgs 8,000 12,000 4,000

Statement of Changes in Equity
A Ltd B Ltd C Ltd
R/E R/E R/E
Balance as at 1/1/2019 110,000 60,000 30,000
Balance as at 31/12/2019 234,000 186,000 124,000
1. A Ltd acquired 75% of equity share capital of B Ltd on 1 st January 2017 when the
retained earnings of B Ltd were Rs. 30,000.
2. A Ltd also acquired 30% of equity share capital of C Ltd on 1st January 2018 when C
Ltd’s retained earnings were Rs. 10,000/=.
3. During the year 2019, A Ltd purchased Rs. 50,000 worth of goods from B Ltd and B Ltd
keeps a markup of 25% on cost. A Ltd is holding Rs. 10,000 worth of goods on the
reporting date.
4. C Ltd sold Rs. 20,000 worth of goods to A Ltd during the year and C ltd keeps a mark-up
of 25% on cost. 50% of these goods are held by A Ltd as of the end of the reporting
period.
You are required to prepare the consolidated statement of comprehensive income for the
Exercise 10
Following financial statements are given.
Rs. ‘000
A Ltd B Ltd C Ltd
Revenue 100,000 90,000 80,000
Cos. (40,000) (45,000) (30,000)
G/P 60,000 45,000 50,000
Finance Cost (8,000) (3,000) (5,000)
Taxation (7,000) (6,000) (5,000)
Profit after tax 32,000 23,000 26,000
Other Comprehension
Revaluation of P.P.A 6,000 7,000 3,000
Available for sat F/A 4,000 5,000 5,000
Total Comprehensive 42,000 35,000 34,000

A Ltd. Equity Statement
Rs. ‘000
S/Cap R/E R/Val Av.S.AA Total
Balance 1/1/2017 20,000 28,000 4,000 2,000 54,000
Balance 31/12/2018 20,000 60,000 10,000 6,000 96,000
B Ltd. Equity Statement

Rs. ‘000
Balance 1/1/2017 15,000 57,000 3,000 2,000 77,000
Balance 31/12/2018 15,000 80,000 10,000 7,000 112,000
C Ltd. Equity Statement

Rs. ‘000
Balance 1/1/2017 20,000 14,000 7,000 5,000 46,000
Balance 31/12/2018 20,000 40,000 10,000 10,000 80,000
Balance Sheet as at 31/12/2018

Rs. ‘000
A Ltd B Ltd C Ltd
Property, Plant, Equipment 200,000 180,000 150,000
Available for Sale F/A 50,000 60,000 40,000
Current Assets
Inventories 15,000 20,000 10,000
T/Receivables 20,000 12,000 8,000
Cash and Bank 5,000 28,000 22,000
490,000 300,000 230,000
S/Capital 20,000 15,000 20,000
Revaluation Reserve 10,000 10,000 10,000
Afa. for Sale F/A 6,000 7,000 10,000
N.C.C 200,000 150,000 110,000
C.L 194,000 38,000 40,000
490,000 300,000 230,000
Following additional information is given.
1. A acquired 80% of equity shares. When the equity of B Ltd was as follows on
1/1/2016.
Retained Earnings 37,000,000
Available for sale financial Assets 1,000,000

A acquired 40% of equity shares in C Ltd on 1/1/2016. When the equity items were as
follows.
Revaluation 3,000,000
Available for Sale F/A 2,000,000
You are required to prepare consolidated comprehensive income statement and the
statements of changes in equity for the year ending 31/12/2018 and the consolidated
statement of financial position as at 31/12/2018.
Exercise 11
Comprehensive Income Statements of A, B and C Ltd for the year ended 31/12/2019.
Rs. ‘000
A Ltd B Ltd C Ltd
Sales 260,000 220,000 230,000
Cost of Sales (130,000) (70,000) (80,000)
Gross Profit 130,000 150,000 150,000
Other Operating Income 30,000 35,000 10,000
Finance Cost (3,000) (4,000) (6,000)
Taxation (9,000) (12,000) (16,000)
Profit after tax 84,000 126,000 109,000
Other comprehensive income
Revaluation of P.P.E 8,000 6,000 5,000
Cash flow hedges 3,000 4,000 2,000
A Ltd. Equity Statement

Rs. ‘000
Cash Flow
S/Cap R/E R/Val Total
Hedges
Balance 1/1/2019 200,000 115,000 14,000 17,000 346,000
Total C/I for the Period 84,000 8,000 3,000 95,000
Dividends (15,000) (15,000)
Balance 31/12/2019 200,000 184,000 22,000 20,000 426,000
B Ltd. Equity Statement

Rs. ‘000
Cash Flow
Hedges
Balance 1/1/2019 150,000 114,000 9,000 16,000 289,000
Dividends (20,000) (20,000)
Balance 31/12/2019 150,000 220,000 15,000 20,000 405,000

C Ltd. Equity Statement
Rs. ‘000
Cash Flow
Hedges
Balance 1/1/2019 100,000 94,000 15,000 8,000 217,000
Dividends (10,000) (10,000)
Balance 31/12/2019 100,000 193,000 20,000 10,000 323,000
Statements of Financial Position as at 31/12/2019

Rs. ‘000
A Ltd B Ltd C Ltd
Property, Plant, Equipment 200,000 320,000 270,000
Available for Sale F/A 90,000 160,000 120,000
Current Assets
Inventories 60,000 78,000 65,000
Dividend Receivable 20,000
Cash and Bank 35,000 39,000 28,000
840,000 650,000 530,000
Stated Capital Rs. 1/= 200,000 150,000 100,000
Revaluation Reserves 22,000 15,000 20,000
Cash flow hedges 20,000 20,000 10,000
Non-current liabilities
Bank Loans 250,000 80,000 60,000
Debentures 100,000 60,000 50,000
Current Liabilities
Trade payables 27,000 53,000 33,000
Dividends payable 15,000 20,000 10,000
Bank OD 22,000 32,000 54,000
840,000 650,000 530,000

1. A Ltd acquired 80% of equity shares of B Ltd on 1st January 2018 when the equity items
were appearing as follows.
2. The fair values of all most all the assets of B Ltd were equal to book values as of the
acquisition date except for on Plant of which fair values were higher by Rs. 30,000 than
its recorded book values and the remaining life time of the asset was 5 years as of the
acquisition date. Depreciation of plant are adjusted to cost of sales.
3. A Ltd, as of the acquisition date, paid 1.5/= per every share acquired and agreed to pay
another 30,000,000/= on 31/12/2019 and the cost of capital to be taken as 10% per
annum. Only the cash consideration of the investment is recorded.
4. A Ltd had sold Rs. 40,000,000/= worth of goods to C Ltd. during the year and C Ltd is
holding Rs. 30,000,000 worth of goods as at the reporting date. A Ltd marks-up the
goods by 50% on cost.
5. B Ltd entered into a forward exchange rate agreement to buy dollars @ Rs. 100 per US
$ in order to import a machine with cost of US $ 500 on 1/1/2019. The payment for the
machine is due on 31st December 2019 and the exchange rate was Rs. 150 per US $. The
only record kept by the company was crediting cash and debating property plant and
equipment by the amount paid on the payment due date. Assume that all the
requirements for cash flow hedge in the standards are fulfilled. Plant life time is 5 years
and depreciation in not charged for the year.
6. A Ltd also acquired 40% of equity shares in C Ltd. On 1st January 2018 when the equity
items of C Ltd were as follows.
You are required to prepare the consolidated financial statements for A Ltd group for the
year ended 31/12/2019.

ACT 3113 Advanced Financial Accounting: Consolidated Accounts

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ACT 3113 Advanced Financial Accounting: Consolidated Accounts

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ACT 3113

Advanced Financial Accounting

• LKAS 28 Investments in Associates

• SLFRS 3 Business Combinations

• SLFRS 10 Consolidated Financial Statements

• SLFRS 11 Joint Arrangements

Lectured By: Kithsiri Samarakoon

Department of Accountancy Page 1

• LKAS 27 Separate Financial Statements

 Group is a parent and its subsidiaries. (SLFRS 10)

Department of Accountancy Page 2

Investment Criteria Required treatment in group

Subsidiary Control Full consolidation

Associate Significant influence Equity accounting

Joint venture Joint control Equity accounting

Investment Asset held for accretion of wealth As a financial asset

1. LKAS 27 Separate financial statements

1) accounted for at cost, or

1) Power over the investee

Department of Accountancy Page 3

Preparation of consolidated financial statements

Exemption from preparing consolidated financial statements

Exclusion of a subsidiary from consolidation

Department of Accountancy Page 4

 Uniform accounting policies should be applied in the consolidated financial

 The results of a subsidiary cease to be included in the consolidated financial

2. SLFRS 3 Business Combinations

Department of Accountancy Page 5

• An asset is identifiable if it either:

• Non-controlling interest is the equity in a subsidiary not attributable, directly or

 The acquisition method

1 Acquirer is One party must be the acquirer; a business

2 Acquisition date The acquisition date is the date on which control is

Department of Accountancy Page 6

Department of Accountancy Page 7

 Assets and liabilities acquired

 Restructuring and future losses

Department of Accountancy Page 8

 Accounting for goodwill

 Measurement period adjustments

Department of Accountancy Page 9

Department of Accountancy Page 10

Fair values of consideration and nest assets of the subsidiary

1. Recognition of depreciable non-current assets at fair values as of the recognition

2. Recognition of unrecorded identifiable intangibles.

Initial Recognition in group Accounts:

3. Recognition of unrecorded contingent liabilities and contingent assets of

SLFRS 3 (business combinations) requires the recognition of unrecognized

Department of Accountancy Page 11

Paid out of post-acquisition Paid out of pre-acquisition profit

Div. Payable of subsidiary Co. Dr

 Calculation of cost of investment

The cost of acquisition includes the following elements.

Department of Accountancy Page 12

Contingent consideration is recognized as part of the consideration transferred in exchange

An obligation to pay contingent consideration is classified as a liability or as equity on the

Types of intra-group trading

- SLFRS 03 governs accounting for all business combinations

Department of Accountancy Page 13

Value in Use Fair value less cost to sell

Department of Accountancy Page 14

Following additional information is provided.