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Title
Group statement of financial position recap
Coverage
The video and these accompanying notes will cover the
basics mechanics of consolidating the financial positions
of a parent and a subsidiary to prepare the group
accounts.
Exam context
This is a process that is straight out of FR but
understanding these basic processes are also essential
to SBR.
In SBR you will not be actually asked to prepare a full
group statement of financial position; but you have been
required to calculate certain key extracts e.g. NCI,
goodwill etc and to explain their meaning.

Tom Clendon
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Group statement of financial position recap

Basic workings for the group statement of financial position -

parent and subsidiary

It is necessary when studying for SBR to be reminded how a simple

group statement of financial position is put together.

The emphasis for SBR is to understand the processes, rather than

consider it a number crunching exercise.

Certain key workings can be asked for in SBR exams, but always
alongside a requirement to explain them.

A group at minimum comprises two companies – a parent and a

subsidiary. The subsidiary is an entity that is controlled – normally by the
parent holding a majority of the shares. The balance not held by the
parent is the non-controlling Interest (NCI).

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The group accounts are prepared as if the group were a single entity.
This is a faithful representation of the situation. Accordingly in preparing
the group accounts the assets and liabilities of the subsidiary are fully
aggregated with those of the parent.

When preparing a group statement of financial position there are five key
workings that are always necessary.

W1 Group structure Notes the P% & NCI %

W2 Net Assets Key working in big number crunching
questions at FR.
W3 Goodwill Potential SBR requirement
W4 NCI Potential SBR requirement
W5 Group Retained Potential SBR requirement
Earnings (RE)

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w2 Net assets of the subsidiary

The fair value of the subsidiary’s net assets at the date of acquisition is a
key ingredient in the calculation of goodwill.

By comparing the net assets at the date of acquisition with the net
assets at the reporting date then the post-acquisition profits of the
subsidiary are ascertained.

The post-acquisition profits of the subsidiary are then split between the
parent and the NCI.

For example; when a 90% subsidiary is acquired with net assets of

$200m but at the reporting date has net assets of $300m.

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In traditional big number crunching questions the net asset working was
an important working.

The net assets of the subsidiary will be represented by the equity of the
subsidiary.

Net Assets At acquisition At reporting date Post- acq

$ $ $
Share Capital X X
RE X X
FVA X X
Depr on FVA (X)
Total X X X

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w3 Goodwill (premium arising on consolidation)

Goodwill arises as a premium on acquisition because the value of the

business as a whole (the controlling and the non-controlling interest)
exceeds the fair value of the net assets acquired.

This is accounted for as an intangible asset and subject to an annual

impairment review as part of its CGU.

Goodwill cannot be revalued.

Impairment losses on goodwill cannot be reversed.

If goodwill is negative then it is regarded as a discount / bargain

purchase and wholly recognised as a profit attributable to the parent.

Goodwill
1 FV of the parent's investment at acquisition X
2 NCI (FV or proportion of net assets) at acquisition X
3 FV of the net assets at acquisition (X)
Goodwill at acquisition X
Less impairment loss (X)
Goodwill at reporting date X

Additional recap notes on goodwill

1 The controlling interest / parent’s investment

The parent's investment (the controlling interest) has to be recorded at

the fair value at the date of acquisition e.g. shares issued at market
value and deferred consideration discounted to the present value of the
future cash flow. Transaction costs are expensed and not capitalised.

If the parent’s investment as stated in the statement of financial position

has since been revalued then only the original FV at acquisition is taken
to the goodwill calculation. As the whole of the parent’s investment is
cancelled as a consolidation adjustment so must any gain on that
investment must also be cancelled.

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2 The NCI

NCI at acquisition can be measured at fair value of the subsidiary's

shares - (NCI% x equity shares x market price = NCI) - and then
goodwill will be in full and any impairment loss split between the group
RE and the NCI in the proportions that profits and losses are shared.

NCI at acquisition can be measured as a proportion of net assets -

(NCI% x net assets = NCI) - and then goodwill is attributable to the
parent only and any impairment loss is suffered by the parent only.

This accounting policy can be made on an acquisition by acquisition

basis.

3 The FV of the net assets of the subsidiary at acquisition

It is possible that fair value of the net assets at the date of acquisition
can be provisional and so it can be revised. Revisions are only possible
up to one year after the acquisition.

Fair value adjustments at acquisition can also be used to introduce

assets and liabilities not recognised by the individual company e.g.
intangible assets such as brand names and customer lists and
contingent liabilities that do have a reliable fair value.

Fair value adjustments that increase assets are taxable temporary

differences and so create a further adjustment to record the deferred tax
liability arising at the date of acquisition and if still appropriate at the
reporting date too.

Fair value adjustments that arise at the date of acquisition are also
included as part of the net assets at the reporting date as it is assumed
that the subsidiary has not incorporated the fair value adjustment into its
own accounting records and that the asset (or liability) subject to the fair
value adjustment still remains.

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w4 NCI

The NCI in the group statement of financial position represents the

interest in the subsidiary's net assets that are not the parent's interest. It
is part of the equity of the group, part of the ownership interest in the net
assets of the group. Being part of equity it shares in the profits and
losses of the subsidiary.

NCI (FV or proportion of net assets)

Opening balance (FV or proportion of net assets) w3 X
Plus the % of the post-acquisition w2 X
Less the % of the impairment loss on full goodwill (NCI at FV) w3 (X)
NCI at reporting date X

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w5 Retained Earnings (RE)

The group retained earnings are basically those of the parent, plus the
share of the subsidiary's post acquisition RE.

Parent’s RE X
Plus % of the post-acquisition RE of the sub w2 X
Less % of the impairment loss on full goodwill (NCI at FV) w3 (X)
Less all of the impairment loss on goodwill attributable to the (X)
parent (NCI a proportion of net assets) w3
X

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Preparing the group statement of financial position

Basic rule is cross casting of the parent's and the subsidiary's assets on
a line by line basis.

Common consolidation adjustments include

Assets

• PPE, add fair value adjustments net of additional depreciation

• Investment in the subsidiary, replace with goodwill net of
impairment losses
• Investment in the subsidiary’s loan notes will be eliminated as inter
company.
• Inventory, less provision for unrealised profit (PURP), plus goods
in transit
• Receivables, less any current account balances
• Cash at bank, plus any cash in transit

Equity

• The equity shares will be that of the parent only.

• Retained Earnings per w5
• NCI per w4

Liabilities

Basic rule is cross casting of the parent's and the subsidiary's liabilities
on a line by line basis.

Common consolidation adjustments include

• Non-current liabilities, less any inter-company loans

• Current liabilities, less any current account balances

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Q Dolphin

Two years ago a parent company paid $90,000 for an investment of

80% of a subsidiary's equity. An extract of the statement of financial
positions at the reporting date shows;

Parent Subsidiary
$ $
Investment in subsidiary 90,000
Assets 35,000 55,000
125,000 55,000

Equity shares 10,000 5,000

Retained earnings 110,000 49,000
120,000 54,000
Liabilities 5,000 1,000
125,000 55,000

At the date of acquisition the retained earnings of the subsidiary were

$34,000 and the fair value of the NCI was $20,000. It is group policy to
measure the NCI at acquisition at fair value.

The fair value of the net assets at acquisition are $64,000, the fair value
adjustment relates to an adjustment on certain items of property plant
and equipment which at the date of acquisition had a remaining life of
five years.

By the reporting date goodwill has been impaired by $1,000.

Required
Prepare the group statement of financial position.

Tom Clendon
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A Dolphin

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A. Dolphin

$
Goodwill W3 45,000
Assets (35,000 + 55,000 + FVA 25,000 – 10,000) 105,000
150,000

Equity shares 10,000

RE W5 113,200
NCI W4 20,800

Liabilities (5,000 + 1,000) 6,000

150,000

W1 Group structure
Parent
Two years ago 80% / 20% NCI

Subsidiary

W2 Net assets
At acquisition At Year-end
$ $
Equity shares 5,000 5,000
Retained earnings 34,000 49,000
Fair value adjustments on PPE (bal fig) 25,000 25,000
Less depr (1/5 x 25,000 x 2 years) (10,000)
Total 64,000 69,000

The rise in the net assets is $5,000 = post-acquisition profits and allocated 80% to
the parent w5 and 20% to the NCI w4.

W3 Goodwill
$
FV of Parent's investment 90,000
FV of NCI 20,000
FV of Net assets (64,000)
Goodwill at acquisition – full 46,000
Less impairment loss (80% / 20%) (1,000)
Goodwill at the year-end 45,000

W4 NCI
$
Opening balance 20,000
Plus NCI% of post -acquisition profit (20% x 5,000) 1,000
Less NCI% imp loss on full goodwill (20% x 1,000) (200)
20,800

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W5 Retained earnings
$
Parent 110,000
Plus parent's % of post-acquisition profit (80% x 5,000) 4,000
Less parent's % of impairment loss on full goodwill (80% x 1,000) (800)
113,200

Tom Clendon