The mechanics of consolidation

(A) Statement of Financial Position:

Following procedures are to be followed for preparing consolidated statement of financial
position:
1. Assets and liabilities of P and S are added together. However, intra group balances are
eliminated.
2. Goodwill or bargain purchase is calculated. Goodwill is tested for impairment for every
year.
3. When assets and liabilities are added together, investment of P is offset against the equity
of S.
4. Non-controlling interest at the end of each reporting period is calculated and reported as
the part of the equity in the statement of financial position.
5. Group retained is earning is equal to P’s retained earnings and S post-acquisition retained
earnings.
6. The word consolidated will be added “ Consolidated Statement of Financial Position”.

The best approach is to use set of standards working and use of worksheet
(W1) Establish the group structure
 Identify date of acquisition
 Identify how much share of subsidiary is controlled by parent.
 How long P has had control over S
(W2) Net Assets of the subsidiary
At the date of At the reporting date Post-acquisition
acquisition
Share Capital X X --
Reserves:
Share Premium X X ---
Retained Earnings X X X
Revaluation Surplus X X X
Other Component of X X X
Equity
Total X X X
Working @ shows the value of S’s net asset at various points in time, give an approximation of
the fair value of S
 The first column shows the fair value of S at acquisition, which can be used to calculate
Goodwill
 The second column shows the fair value of S’s net assets at the year-end.
 The final column shows the post-acquisition movement in S’s net assets. The increase or
decrease will be split between the 2 parties that own S(the parent and the non-controlling
interest), according to their % ownership.
 If there is a post-acquisition revaluation surplus, the group share of the post-acquisition
revaluation would be part of the group revaluation surplus and not taken to retained
earnings.

(W3) Goodwill
Tk.
Parent holding(investment) at fair value X
Non-controlling Interest at acquisition X
X
Less: Fair value of net asset at acquisition (W2) (x)
Goodwill on acquisition X
Impairment (x)
Balance of Goodwill at reporting date X

There may be Goodwill or bargain purchase.

(W4) Non-controlling Interest (NCI)

NCI at Acquisition- if fair value method is adopted:
NCI value= (Number of shares NCI own * Subsidiary share price)
NCI at Acquisition- if proportion of net assets method is adopted:
NCI Value= NCI % * Fair value of net assets at acquisition (From W2)
NCI at reporting date:
NCI value at acquisition (W3) X
NCI share of post-acquisition reserve (W2) X
NCI share of impairment (fair value method only) (x)
NCI at reporting date X

This shows the value of the subsidiary that is not owned by the parent at year end.
(W5) Group Retained Earning
Tk.
P’s retained Earnings (100%) X
P’s % of S’s post-acquisition retained earnings X
Less: P’s share of impairment (W30 (X)
x

This shows the retained earnings that are attributable to the parents’ shareholders.

Discussion Problem-01
On May 1 2020 Karl bought 60% of Susan paying Tk. 76,000 cash. The summarized statements
of financial position for the two entities as at 30 November 2020 are:
Karl Susan
Non-current assets:
Property, plant & Equipment 138,000 115,000
Investments 98,000 ------
Current Assets
Inventory 15,000 17,000
Receivables 19,000 20,000
Cash 2,000 ------
Total Assets 272,000 152,000
Equity:
Share Capital 50,000 40,000
Retained Earnings 189,000 69,000
Total Shareholder Equity 239,000 109,000
Non-current liabilities: 8% loan notes ---- 20,000
Current liabilities 33,000 23,000
Total Labilities & shareholder Equity 272,000 152,000

The following information is relevant:

(i) The inventory of Karl includes Tk. 8,000 of goods purchased for cash from Susan at
cost plus 25%.
(ii) On 1 June 2020, Karl transferred an item of plant to Susan for Tk. 15,000. It carrying
amount at that date was Tk. 10,000 and its remaining useful life was 5 years.
(iii) Karl 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 Tk. 50,000.
(iv) An impairment loss of Tk. 1,000 is to be charged against goodwill at the year end.
(v) Susan earned a profit of Tk. 9,000 in the year end 30 November 2020.
 (vi) The loan note in Susan’s books represents monies borrowed from Karl on 30
November 2020.
(vii) Included in Karl’s receivables is Tk. 4,000 relating to inventory sold to Susan during
the year. Susan raised a cheque for Tk. 2,500 and sent it to Karl on 29 November
2020. Karl did not receive this cheque until 4 December 2020.
Required:
Prepare the consolidated statement of financial position as at 30 November 2020.

Solution:
W1 ( Group Structure)
Acquisition Date= 1st May 2020
Reporting Date= 30th November 2020
Post-Acquisition period= 7 months
Karl hold 60% shares of Susahn

W2 (Net Asset of Sushan)

At 1st May 2020 30th November 2020 Post Acquisition
Share Capital 40,000 40,000 -----
Retained Earning 63,750 69,000 5250
Profit Intercompany Sales (1,600) (1600)
Excess depreciation in Sushan 500 500
book
103,750 4,150

Post-acquisition profit = 9,000* 7/12= 5,250

Profit in Inventory = 8,000* 25/125= Tk. 1600
Excess Depreciation Charged
Depreciation charged after transfer ( Susans book) (15,000/5 * 6/12)= Tk. 1,500
Depreciation charged before transfer (Karl book) (10,000/5*6/12)= Tk. 1,000
Excess Depreciation charged in sushan’ Book = Tk. 500
W3 (Calculation of Goodwill)
Parent holding (Investment) at fair value Tk. 76,000

NCI at fair value Tk. 50,000

Less: Net Asset of Subsidiary Tk. 103,750
Goodwill at Acquisition (1st May 2020) Tk. 22,250
Impairment of Goodwill Tk. 1,000
Goodwill at reporting date (30th November 2020) Tk. 21,250

W4 (Calculation of Non-controlling Interest)

NCI at acquisition date Tk. 50,000
NCI share of post-acquisition reserve (4,150*40%) Tk. 1,660
NCI share of Goodwill Impairment (1000* 40%) Tk. (400)
NCI at reporting date (30th November 2020) Tk. 51,260

W5 (Group Retained Earning)

Tk.
Kar’s retained Earnings (100%) Tk. 189,000
Profit on Transfer of plant asset (Karl’s book) Tk. (5,000)
Karl’s % of S’s post-acquisition retained earnings Tk. 2,490
(4150*60%)
Less: P’s share of impairment (1000*.60%) Tk. (600)
Tk. 1, 85,890

Karl Limited
Consolidated Statement of Financial Position
at November 30, 2020
Tk.
Non-current assets:
Property, plant & Equipment (138,000+115,000-5,000+500) 248,500
Investments (98,000-76,000-20,000) 2,000
Goodwill 21,250
Current Assets
Inventory (15,000+17,000-(25*8,000/125) 30,400
Receivables (19,000+20,000-4,000) 35,000
Cash (2,000+2,500) 4,500
Total Assets 3,41,650
Equity:
 Share Capital 50,000
Retained Earnings 185,890
Non-Controlling Interest 51,260
Total Shareholder Equity 2,87,150
Non-current liabilities: 8% loan notes ------
Current liabilities (33,000+23,000-1,500) 54,500
Total Labilities & shareholder Equity 341,650

Discussion problem-02

H has owned 80% of the ordinary shares if S and 30% of the ordinary shares of A for many
years. The information below is required to prepare the consolidated statement of profit & loss
for the year ended 30 June 2018.
Statement of profit & loss for the year ended 30 June 2018
H S A
Revenue 500,000 200,000 100,000
Cost of Sales (100,000) (80,000) (40,000)
Gross Profit 400,000 120,000 60,000
Distribution Expenses (160,000) (20,000) (10,000)
Administrative Expenses (140,000) (40,000) (10,000)
Profit from operations 100,000 60,000 40,000
Tax (23,000) (21,000) (14,000)
Profit after tax 77,000 39,000 26,000

Note: There were no items of other comprehensive income in the year

At the date of acquisition, the fair value of S’s plant and machinery which at that time had a
remaining useful life of ten years exceeded the book value by Tk. l0,000.
During the year S sold goods to H for Tk. 10,000 at a margin of 25%. By the year-end H had
sold 60% of these goods.
The group accounting policy is to measure non-controlling interests using the proportion of net
assets method. The current year goodwill impairment loss was Tk. 1,200 and this should be
charged to administrative expenses.
By 1 January 2018, H signed a contract to provide a customer with support services for the
following twelve months. H received the full fee of Tk. 30,000 in advance and recognized this as
revenue.
Required: Prepare the consolidated statement of profit or loss for the year ended 30 June 2018.

H ltd.
Consolidated Statement of Profit & Loss
For the year ended June 30, 2018

Sales (500,000+200,000-10,000-15,000) 675,000

Cost of Goods Sold (100,000+80,000-9,000+1,000) 172,000
Gross Profi t 503,000
Distribution Costs 180,000
Administrative Expenses (140,000+40,000+1200) 181,200
Profit from Operation 141,800
Share of Profit of Associate (26,000*30%) 7,800
Profit before Tax 149,600
Tax 44,000
Profit for the period 105,600
Profit Attributable to:
Parent (BF) 98,200
NCI 7400
Profit for the period 105,600

W1 (Group Structure)
H- Parent
S- Subsidiary (Consolidation)
A-Associate (Equity Accounting)
H hold 80% of S, hence NCI is 20%

W2
Sales –Dr. Tk. 10,000
Cost of Goods sold-----Cr. 9,000 (6,000+7,500*40%)
Inventory------Cr. 1000
Cost of Tk. 10,000 = 10,000* 75%= Tk. 7500
Sold outside the group= 10,000* 60%= 6,000
Remained as inventory in H book = (10,000-6,000) = Tk. 4,000
Inventory remained in H book at cost value = (8000* 40%) or 4,000/125* 1000 = 3200

W3
Depreciation Charged by S book is lower compared to consolidation depreciation
The excess depreciation should be charged is = Tk. 10,000/10= 1,000

W4 Calculation of NCI
Profit of S= 39,000
Less: Deprecation= 1,000
Less: Unrealized Profit= 1,000
Adjusted Profit of S= 37,000
NCI= (37,000*20%)= 7400

Profit on sales = (10,000* 25%)= 2500

Profit on group inventory ( 2500*40%)= 1,000

Discussion Problem-03

P ltd acquired 70% of S ltd three years ago, when S’s ltd retained earning was Tk. 430,000. The
financial statements of each company for the year ended 31 March 2021 are as follows:
Statements of financial position
as at 31 March 2021
P (‘000) S(‘000)
Non-current Assets:
 Property Plant & Equipment 900 400
Investment in S at cost 700 ---
Current Assets 300 600
Total Assets 1,900 1,000
Share Capital ($1) 200 150
Share Premium 50 ---
Retained Earnings 1,350 700
1600 850
Non-current Liabilities 100 90
Current Labilities 200 60
Total Liabilities & Equity 1,900 1,000

Statement of Profit & Loss

For the year ended 31 March 2021

P (‘000) S(‘000)
Revenues 1,000 260
Cost of Sales (750) (80)
Gross Profit 250 180
Operating Expenses (60) (35)
Profit from Operations 190 145
Finance Costs (25) (15)
Investment Income 20 ---
Profit Before Tax 185 130
Income Tax Expenses (100) (30)
Profit for the year 85 100

You are provided with the following additional information:

(i) S had plant in its statement of financial position at the date of acquisition with a
carrying amount Tk. 100,000 but a fair value of Tk. 120,000. The plant had remaining
life of 10 years at acquisition. Depreciation is charged to cost of sales.
(ii) The P group values the non-controlling interest at fair value. The fair value of the
non-controlling interest at the date of acquisition was Tk. 250,000. Goodwill has been
impaired by a total of 30% of its value at the reporting date of which one third related
to current year.
(iii) At the start of the year, P transferred a machine to S for Tk. 15,000. The asset had
remaining useful of 3 years at the date of transfer. It had carrying amount of Tk.
12,000 in the books of P at the date of transfer.
(iv) During the year S sold some goods to P for Tk. 60,000 at mark -up of 20%. 40% of
the goods remained unsold at the year end. At the year end S books showed a
receivables balance of Tk. 6,000 as being due from P. This disagreed with payable
balance of Tk. 1,000 in P’s books due to P having sent a cheque to S shortly before
the year end which S had not yet received.
 (v) S paid a dividend of Tk. 20,000 on March 1 2021.
Required: Prepare the consolidated statement of Financial Position and Consolidated Statement
of Profit & Loss for the year ended March 31, 2021 for P group.

Working Notes:
(1) Group Structure
P (parents) hold 70% of S(subsidiary)
30% Non-controlling interest
Acquiring date= 3 years before.

W2 (Net Asset of S)
March 31, 2018 March 31, 2021 Post Acquisition
Share Capital 150,000 ------- -----
Retained Earning 430,000 700,000 270,000
FV adjustment Machine 20,000 20,000 ------
FV Depreciation (2000*3) (6000) (6000)
Depreciation on Machinery 1000 1000
Profit on intercompany sales (4000) (4,000)
600,000 861,000 261,000

Cost of Goods sold by S on intercompany sales 60,000/120*100= 50,000

Profit on intercompany sales = (60,000-50,000) =10,000
Unrealized Profit = 10,000* 40%= 4,000

W3 (Calculation of Goodwill)
Parent holding (Investment) at fair value Tk. 700,000

NCI at fair value Tk. 250,000

Less: Net Asset of Subsidiary* Tk. 600,000
Goodwill at Acquisition (31st December 2018) Tk. 350,000
Impairment of Goodwill (70,000+35,000) Tk. 105,000
Goodwill at reporting date (31st December 2021) Tk. 245,000

*Net Asset of S= (150,000+430,000+20,000) = Tk. 600,000

W4 (Calculation of Non-controlling Interest)

at balance sheet
NCI at acquisition date 250,000
NCI share of post-acquisition reserve (261,000*30%) 78,300
NCI share of Goodwill Impairment (105,000*30%) 31,500
NCI at reporting date (31st December 2021) 296,800
at statement of profit & loss
Profit after tax =100,000
Depreciation adjustment (at acquisition) = (2,000)
Depreciation adjustment (current year transfer) =1,000
Unrealized Profit =4,000
Impairment Of goodwill =(35,000)
= 60,000
NCI at profit & loss=60,000*30%= 18,000

W5 (Group Retained Earning)

Tk.
P retained Earnings (100%) Tk. 1,350,000
Profit on Transfer of plant asset (Karl’s book) Tk. (3,000)
P % of S’s post-acquisition retained earnings Tk. 182,700
(261,000*70%)
Less: P’s share of impairment (105,000*70%) Tk. (73,500)
14,562,000