TEAM HOMMIES

MAF 3101: ADVANCED ACC COURSE NOTES

CHAPTER 4: CONSOLIDATED FINANCIAL STATEMENTS

Introduction:

The purpose of this chapter is to introduce the concept of a group of companies to explain how a
group statement of financial position and statement of comprehensive income and other related
matters are prepared

A group of companies consists of a parent company together with one or more subsidiary companies
which are controlled by the parent company. Control of a subsidiary is usually achieved by acquiring
over 50% of its ordinary shares. The shareholders of a parent company have an indirect interest in the
net assets and in the profits or losses of the company‟s subsidiaries. Accordingly, parent companies
are required to prepare and present a set of accounts for the group as whole in recognition of the fact a
parent company and its subsidiaries are in effect, a single economic unit.

The main international standards which apply to the preparation of group accounts

IFRS 10- Consolidated Financial Statements

IFRS 3- Business Combinations

IAS 27- Consolidated Financial statements and accounting for investments in subsidiaries

IAS 22- Business Combinations

IAS 28- Accounting for investments in associates

IAS 31- Financial reporting of interests in joint ventures

Objectives

By the end of this chapter, the reader should be able to:

Explain what is meant by a set of consolidated financial statements

Define the term „parent‟, „subsidiary‟ and „control‟ in accordance with international standards IFRS
10.

Prepare a group statement of financial position both at the date of acquisition subsequent to
acquisition, accounting correctly for goodwill
Prepare a group statement of comprehensive income

Eliminate intra-group balances and unrealized profit a arising on the transfer of assets between group
companies at more than cost

Key definitions:

Business Combinations: this is the bringing together of separate entities or business into the
reporting entity. The result of nearly all business combinations is that one entity, the acquirer obtains
control of one or more other businesses, the acquiree.

Acquisition: a business combination in which one of the enterprises, the acquirer, obtains control
over the net assets and the operations of another enterprise, the acquiree, in exchange for the transfer
of assets, incurrence of a liability or issue of equity.

Control: the power to govern the financial and operating policies of an enterprise so as to obtain
benefits from the activities. If one enterprise controls another, the controlling enterprise is called the
parent and the controlled enterprise is called a subsidiary.

Subsidiary: an entity, including an unincorporated entity such as partnership that is controlled by

another entity (known as the parent)

A subsidiary company is an undertaking, which is either controlled by another undertaking (co) or

where the other undertaking exercises a dominating influence over it.

Parent: an entity that has one more subsidiaries

Associate: an enterprise in which an investor has significant influence and which is neither a
subsidiary nor a joint venture. Associate company is a company which the parent company has
substantial interest but not a controlling interest

Significant influence: is the power to participate in the financial and operating policy decisions of an
economic activity but has no control over those policies

Minority interest: that part of the net results of operations and of net assets of a subsidiary
attributable to interests which are not owned, directly or indirectly through subsidiaries, by the parent

Uniting of interests: a business combination in which the shareholders of the combining enterprises
combine control over the whole, or effectively the whole, of their net assets and operations to achieve
a continuing mutual sharing in the risks and benefits attaching to the combined entity such that neither
party can be identified as the acquirer, also called pooling of interests

Consolidated financial statements: the financial statements of a group presented as those of a single
economic activity.

Joint venture: a contractual agreement whereby two or more parties undertake an economic activity.
Preparation of consolidated financial statements

IFRS 10 requires that a parent prepares consolidated financial statements using uniform accounting
policies for transactions and other events in similar circumstances

How to determine controlling interest

Control interest arises when accompany has the ability to influence the activities of another company
in order to gain economic benefit from such control. Controlling interest can be determined,

i). By use of the voting rights which must be more than 50% of the voting rights of that other
company.

It is agreed that ordinary shares should be used instead of preference shares because the former have
voting rights e.g. A company buys 30,000 of the 50,000 ordinary shares in B ltd and 10,000 of the
20,000 preference shares.

Determine the controlling interest

A Ltd‟s controlling interest in B = = 60%

The 40% is referred to as minority interest

ii). If a company has an exclusive right to appoint the board of directors of another company then,
it has a controlling interest or power to govern the financial and operating policies of the other
entity under statute or agreement.
iii). If the company has power to cast the majority votes at meetings of the board of directors or
equivalent governing body of the other entity

PREPARATION OF CONSOLIDATED STATEMENT OF FINACIAL POSITION

ACCOUNTING FOR INVESTMENT IN SUBSIDIARIES

A subsidiary is an entity, including an unincorporated entity such as a partnership that is controlled by

another known as a parent

Method of accounting
All business combinations shall be accounted for by applying the purchase method. Applying this
method involves

i). Identifying the acquirer

ii). Measuring the cost of the business combination and
iii). Allocating at the acquisition date, the cost of the business combination to the assets acquired
and liabilities and contingent liabilities assumed

Cost of combination:

The acquirer shall measure the cost of combination as the aggregate of:

 The fair value, at the date of exchange, of assets given, liabilities incurred and assumed, and
equity instruments issued by the acquirer, in exchange for control of the acquiree; plus
 The cost directly attributed to the business combination

The acquisition date is the date in which the acquirer obtains control of the acquiree

Preparation

Each companies prepares its accounting records and annual financial statements in a usual way from
the individual companies‟ statements of financial position, the holding company then prepares a
consolidated statement of financial position for a group

Steps to consider

a) Determine the group structure. This shows the exact share of ownership by the parent,
subsidiary or associate and it can involve direct or indirect interest
b) Reserves/ net assets schedule: this highlights the ordinary share capital, retained earnings
(accumulated profits) and their various adjustments during the financial period.
c) Purchase consideration/ investment: this shows the investment made by the acquirer (parent)
on the acquired
d) Determination of goodwill on consolidation IFRS 3:
The acquirer shall, at the acquisition date
i Recognize goodwill acquired in a business combination as an asset and
ii Initially measure that goodwill at its cost, being the excess of the cost of the business
combination over the acquirer‟s interest in the fair value of the identifiable assets,
liabilities and contingent liabilities.

After the initial recognition, the acquirer shall measure goodwill acquired in a business
combination at cost less any accumulated impairment losses

e) Inter-group transactions/items: the individual statement of financial position of the parent

subsidiary companies are likely to include inter-group items i.e. amount owing between two
group companies. These inter-group items must be eliminated when the consolidated balance
sheet is prepared, in order to show the proper position of the economic unit, the group

Current accounts: At the end of the year current accounts may not agree, owing to the existence
of in transit items such a goods or cash; the usual rules are
 i If the goods/cash are in transit between the parent and the subsidiary , make the
adjusting entry in the balance sheet of the parent , irrespective of the direction of
transfer
ii If the goods/cash are in transit between subsidiaries, then adjust in the books of the
ultimate recipient.

Inter-company unrealized profits: from the group point of view, transfers from one member of the
group to another merely constitute an internal transfer not a sale; therefore the profit element should
be eliminated off the seller and the stock off the buyer or assets however if the transferred items are
subsequently sold to parties outside the group then any profit on them will be regarded as having been
realized.

E.g. X sold goods to Y for 2000 which represented cost plus 25% at the balance sheet date goods
valued at the transfer price of 1,200 were still unsold and included in y‟s stock

Qn: calculate the unrealized profit included in the closing stock valuation for the group

Soln:

X sold 2,000 to Y

Closing stock = 1,200, mark up (cost plus) of 25%

Unrealized profit = =240

Dr. profit/Loss

Cr. Closing stock

f) Minority interest/ Non-Controlling interest (NCI)

Minority interest/ Non-Controlling interest (NCI)

What happens if A owns only 80% of the ordinary shares of B Ltd. In this case there is said to be
minority interest (NCI) of 20% . What happens to this?

The general accepted solution is to consolidate all the subsidiary‟s net assets and then bring in a
counter balancing liability on the consolidated balance sheet to represent that part of the assets
controlled but not owned. This liability is quite presented separately in the consolidated balance sheet
and NCI/Minority interest.

g) Determine the group retained earnings. This step involves calculating the group retained
earnings while considering all the necessary adjustments up to the balance sheet date.
QUESTION ONE:

a) Describe the difference between control and significant influence

b) Shell Ltd acquired a subsidiary, Kobil Ltd on 1st October 2017. The statements of financial
position of shell and Kobil Ltd as at 30th September 2018 are as follows

Shell Ltd Kobil Ltd

Non-Current assets
Property, plant & equipment 53,181,000 36,762,000
Investment in Kobil Ltd 29,000,000
82,181,000
Current Assets 28,484,000 10,337,000
Total Assets 110,665,000 47,099,000
Equity
Ordinary share capital 20,000,000 5,000,000
Share premium 10,000,000 2,000,000
Retained earnings 34,225,000 28,370,000
64,225,000 35,370,000
Liabilities
Non-Current liabilities
Long term loan 35,000,000 8,000,000
Current liabilities 11,440,000 3,729,000
110,665,000 47,099,000

Additional information

i The share capital of Kobil Ltd consists of ordinary shares 1/= each. There have been no
changes to the balances of share capital and share premium during the year.no dividends were
paid or proposed by Kobil Ltd during the year
ii Shell Ltd acquired 3,000,000 shares in Kobil Ltd on 1st October 2017
iii On 1st October, the retained earnings of Kobil were 24,700,000
iv The fair value of the non-current assets of Kobil Ltd at 1st October 2017 was 37million
shillings. The book value of the non- current assets at 1st October 2017 was 33million
shillings. The revaluation has been recorded in the books of Kobil Ltd. (ignore any effect on
the depreciation)
v During the year shell received fuel worth 45, 000,000/= from Kobil Ltd 1/3 of the fuel was
unsold. Kobil Ltd invoice at cost plus 25%
vi The directors have concluded that goodwill on the acquisition of kobil Ltd has been impaired
during the year. They estimate that the impairment loss amounts to 20%of the goodwill

Required:
Prepare the consolidated statement of financial position for shell Ltd as at 30thSeptemeber 2018
QUESTION TWO
On 1 May 2020 H Ltd bought 60% of S Ltd paying $76,000 cash. The summarized statements of
financial position for the two companies as at 30 November 2020 are:

H Ltd S Ltd
Non-current assets $ $
Property, plant and equipment 138,000 115,000
Investments 98,000 -
236,000 115,000
Current assets
Inventory 15,000 17,000
Trade receivables 19,000 20,000
Bank 2,000 -
Total assets 272,000 152,000

Equity and liabilities

Equity
Share capital 50,000 40,000
Retained earnings 189,000 69,000
239,000 109,000
Non-current liabilities
8% Loan notes - 20,000
Current liabilities 33,000 23,000
Total equity and liabilities 272,000 152,000

The following information is relevant:

(1) The inventory of S Ltd includes $16,000 of goods purchased from H Ltd at cost plus 25% but
unfortunately half of the goods were sold.
(2) On 1 June 2020 S Ltd transferred an item of plant to H Ltd for $15,000. Its carrying amount at
that date was $10,000. The asset had a remaining useful economic life of 5 years.
(3) The H 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 $50,000.
(4) An impairment loss of $1,000 is to be charged against goodwill at the year-end.
(5) S Ltd earned a profit of $9,000 in the year ended 30 November 2020.
(6) The loan note in S Ltd‟s books represents monies borrowed from H Ltd during the year. All of
the loan note interest has been accounted for.
(7) Included in H Ltd‟s receivables is $4,000 relating to inventory sold to S Ltd during the year. S
Ltd raised a cheque for $2,500 and sent it to H Ltd on 29 November 2020. H Ltd did not
receive this cheque until 4 December 2020.

Required:
Prepare the consolidated statement of financial position of H Ltd as at 30 November 2020.
QUESTION THREE
IFRS 10 requires that a parent prepares consolidated financial statements using uniform accounting
policies for transactions and other events in similar circumstances, however, a parent NEED NOT to
present consolidated financial statements under the following conditions.

(a) Briefly explain the above conditions or circumstances

(b) Distinguish between a subsidiary company and an associate company
(c) Statement of financial position of PP Ltd and Savanna security Group as at 30th June 2018 are
given below:
Details PP Ltd Savanna Ltd
UGX UGX
Non-Current assets
Land 4,500,000 2,500,000
Plant & Equipment 2,400,000 1,750,000
Investment 8,000,000
Current assets 5,200,000 1,700,000
20,100,000 5,950,000
Equity
Share capital 5,000,000 1,000,000
Retained earnings 8,300,000 3,150,000
13,300,000 4,150,000
Non-current liabilities
8% loan stock 4,000,000 500,000
Current liabilities 2,800,000 1,300,000
20,100,000 5,950,000

Additional information

i). PP Ltd acquired 75% on 1/07/2015 when the balance of Savanna Ltd retained earnings
was 1,150,000/=. PP Ltd paid 3,500,000/=for its investment in the share capital of
savanna. At the same time, PP invested in 60% loan stock.
ii). At the reporting date PP Ltd recorded a payable to savanna of 400,000/=. This did not
agree to the corresponding amount in savanna‟s financial statements of 500,000/= the
difference is explained as cash in transit
 iii). At the date of acquisition it was determined that savanna‟s land, carried at cost of 2, 5000,
000/= had affair value of 3,750,000/=. Savanna‟s plant was determined to have a fair value
of 500,000/= in excess of its carrying value and had a remaining life of 5 years at this time.
These values had not been recorded by savanna
iv). The inventory of savanna includes goods worth 2,000,000/= purchased from PP Ltd at cost
plus 25%
v). Its group policy to measure goodwill in full. The fair value of the non-controlling interest
at acquisition was 1,100,000/=
vi). Goodwill has been impaired
Required

Prepare the consolidated statement of financial position of PP group as at 30th June 2018

ACCOUNTING FOR INVESTMENTS IN ASSOCIATES (IAS28)

An associate is an enterprise in which the investor has significant influence and which is neither a
subsidiary nor a joint venture but not control. In this case significant influence means the power to
participate in the financial and operating policy decisions on an enterprise in which an investment is
held, but not control over the policies. A holding of 20% or more of the voting power is presumed to
give significance influence, unless it can be clearly demonstrated that this is not the case. However, it
is presumed that a holding of less than 20% does not give significant influence, unless such influence
can be clearly demonstrated

Equity Method of accounting

Equity basis account is defined in IAS28 as the method of accounting where by the investment is
initially recorded at cost and adjusted thereafter for the post-acquisition change in the investor‟s share
of net assets of the associate
QUESTION ONE

a) Define the following terms used in Group Accounting

i) Non -Controlling interest
ii) Parent company
iii) An associate company
iv) Gain on bargain purchase
v) Indirect interest/ control
b) Below are the summarized Accounts for three entities for the year ended 30/6/2019 that was
presented to you to look into.
Particulars KLA Ltd GUL ltd JJA Ltd
ASSETS UGX’000 UGX’000 UGX’000
Tangible non-current 100,000 80,000 65,000
assets
Investment
-Gulu Ltd -90,000 - -
-JJA Ltd -31,000 - -
Inventories 80,000 50,000 35,000
Receivables 70,000 35,000 23,000
Cash at Bank 37,000 20,000 1,500
408,000 185,000 124,500
Equity and Liabilities
Equity capital (UGX 100,000 75,000 50,000
1,000 per share)
Retained earnings 150,000 50,000 40,000
Share premium 55,000 20,000 18,500
General reserves 53,000 25,000 11,000
Liabilities 50,000 15,000 5,000
408,000 185,000 124,500

You were also given additional information relating to three entities as follows.

1. KLA Ltd acquired 60,000 ordinary shares of GUL Ltd and 15,000 ordinary shares on JJA Ltd
at the beginning of the year.
 2. On 1st July 2018, the balances on the equity accounts of GULU ltd were as follows
Details GULU JJA
UGX ‘000’ UGX ‘000’
Share premium 10,000 18,500
General Reserves 5,000 11,000
Retained Earnings 10,000 25,000

3. Inventory of KLA Ltd includes goods purchased from GUL Ltd for UGX 20,000,000. GUL
charged out these goods at cost plus 25% mark up.
4. Payable of KLA Ltd includes UGX 6,000,000 Payable to GULU Ltd in respect of inventory
purchased. Receivables of GUL Ltd include UGX 9,000,000 due from KLA Ltd. KLA Ltd
sent a cheque for UGX 3,000,000 to GULU Ltd on 29th June 2019 which was UGX 5,000,000.

REQUIRED: Prepare the Group consolidated statement of financial position as at 30th June
2019 clearly showing the workings.

QUESTION TWO

The statements of financial position of MLDD, PLDD and QLDD as at 31/06/2014 are as follows

Details MLDD PLDD QLDD

‘000’ ‘000’ ‘000’
Non-Current Assets
PPE 2,570,000 370,000 280,000
Investment -PLDD 410,000
-QLDD 100,000
Total 3,080,000 370,000 280,000
Current Assets 1150,000 220,000 170,000
Net Assets 4,230,000 590,000 450,000
Equity
Ordinary Share Capital 1,000,000 100,000 80,000
Retained Earnings 2,420,000 380,000 280,000
Total 3,420,000 480,000 360,000
LIABILITIES
Current Liabilities 810,000 110,000 90,000
4,230,000 590,000 450,000

Additional information
 a) On 31st July 2011 MLDD paid UGX 410,000,000 to acquire 90% of the share capital of
PLDD. The retained earnings of PLDD on that date were 220,000,000. The company‟s issued
share capital has not changed since MLDD acquired its holdings.

On 31st July 2011 the fair value of Non-Current assets of PLDD was 80,000,000 higher than their
value. This valuation has not been reflected in the books of PLDD

b) On 31st July 2013 MLDD paid 100,000,000 to acquire 25% of the share capital of QLDD. The
retained earnings of QLDD on that date were 240,000,000 and all its assets and liabilities were
carried at a fair value. The company‟s issued share capital has not changed since MLDD
acquired its holdings.
c) There have been no impairment losses
d) NCI in subsidiaries are to be measured at the appropriate proportion of the subsidiaries
identifiable net assets

Required:
Prepare a consolidated statement of financial position as ta the year end

QUESTION THREE
Below are the summarized statements of financial position for the three companies as at 31 st
December 2014
Details RUBIS LTD KOBIL LTD DELTA LTD
UGX. ‘000’ UGX. ‘000’ UGX. ‘000’
Non-current assets
Property, Plant & equipment 1,120 980 840
Investments
672000 shares in UMEME 644
168000 shares in UCL 224
1,988 980 840
Current assets
Inventory 380 640 190
Receivables 190 310 100
Cash 35 58 46
TCA 605 1008 336
Total Assets 2,593 1,988 1,176
Equity & Liabilities
Ordinary Shares at 1/= each 1,120 840 560
 Retained earnings 1,232 602 448
2,352 1,442 1,008
Current liabilities
Trade payable 150 480 136
Taxation 91 66 32
241 546 168
Total Equity and Liabilities 2,593 1,988 1,176

Additional information:
i. RUBIS LTD acquired its shares in KOBIL on 1st January 2014 when it had retained
losses of 56,000/=
ii. RUBIS LTD acquired its shares in DELTA Ltd on 1st January 2014 when it had retained
earnings of 140,000/=
iii. During the year KOBIL sold goods to PAF for 400,000 at a margin of 25%. By the end of
the year, RUBIS LTD had quarter of the goods still in inventory.
iv. In July, DELTA Ltd sold goods to RUBIS LTD for 150,000/=. These goods had cost
Uganda clays 100,000/=. RUBIS LTD had 90,000/= of the goods in inventory by the year
end.
 v. An impairment test at the end of the year shows that goodwill for KOBIL remains
unimpaired but the goodwill arising on the acquisition of DELTA Ltd has been
impaired by 2,800.
vi. PAF group values non-controlling interest using the fair value method. The fair
value on 1st January 2014 was 160,000/=.
Required:
Prepare the consolidated statement of financial position as at 31 st December 2014. (25
marks)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (P&L A/C)

Just as the statement of comprehensive income of a single company shows results of the year
trading of that company so does the consolidated statement of comprehensive income shows
results of trading in the year by the holding company together with subsidiaries

Consolidated statement of comprehensive income is prepared by combining the information

given in the statement of comprehensive income of individual companies after making any
adjustments that may be necessary to eliminate inter-group company items such as,
unrealized profits, inter-company items etc.

Consolidated statement of comprehensive income has an underlying form as follows.

Section A: To show the results achieved with the assets under the directors control. This
normally shows the whole of turnover, cost of sales, gross profit, taxation and profit and loss
on ordinary activities after taxation

Section B: To show how much of the net gains shown in section A accrues to Holding/Parent
company shareholders and how much to others. This section basically shows a deduction for
minority interest share of the profits of subsidiaries not wholly owned by the group.

Section C: To show how the directors intend to dispose of the gains accruing to holding
company shareholders. The section specifically shows dividends, capitalized profits (if any)
retained profits or transfer of reserves

ILLUSTRATION

P Ltd owns 80% of the shares in Soil Ltd. The statements of comprehensive income of the
companies for the year ending 31st December are as follows

Details P Ltd Soil Ltd

UGX‟ 000‟ UGX „000‟
Revenue 640,000 330,000
Cost of sales 410,000 200,000
Gross profit 230,000 130,000
Distribution costs (35,000) (20,000)
Administrative costs (70,000) (55,000)
Profit before taxation 125000 55,000
Taxation (26,000) (10,000)
Profit for the year 99,000 45,000

Additional information

i). Soil Ltd sold goods which cost 20,000,000/= to P Ltd for 30,000,000/=
ii). At the end of the year, 305 of the goods in (1) above had not been sold.
iii). Of the 35,000,000/= retained profits of Soli Ltd brought forward, 15,000,000 is post-
acquisition profits

Required: Prepare P Ltd consolidated statement of comprehensive income for the year ended
2017

Solution:

P Ltd

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDING 31ST DECEMBER 2017

DETAILS “MILLIONS”
Revenue (640+330-30) 940
Cost of sales (410+200-30+3) 583
Gross profit 357
Administrative expenses (70+55) (125)
Distribution expenses (35+20) (55)
Profit before taxation 180
Taxation(26+10) (36)
Profit after taxation 141
Minority interest(w3) (9)
Profit for the financial year 132

Workings

W1: Revenue

640+330- intercompany sales of 30 = 940

W2: Cost of sales

410+200- intercompany purchases of 30 +unrealized [profits in inventory (30% of 10)= 583

W3: Minority interest

20% of 45,000,000 = 9,000,000

QUESTION ONE:

P co acquired 60% of the equity shares of S co on 1st April 2015. The statements of
comprehensive income for the two companies for the year ended 31st December 2015 are set
out below

Details P co S co

Sale revenue 170,000 80,000

Cost of sales (65,000) (36,000)

Gross profit 105,000 44,000

Other incomes – dividends received from S co 36,000

Administrative expenses 43,000 12,000

Profit before tax 65,600 32,000

Income tax expense 23,000 8,000

Profit for the year 42,600 24,000

Notes

Dividends (paid 31 Dec) 12,000 6,000

Profit retained 30,600 18,000

Retained earnings brought forward 81,000 40,000

Retained profits carried forward 111,600 58,000

Required: prepare the consolidated statement of comprehensive income and retained

earnings extract from the statement of changes in equity

QUESTION TWO

The following information relates to Jem group of companies for the year to 30th April 2017
 Details Jem Co ($000) Pem Co ($000) Rem Co ($000)
Sales revenue 1,100 500 130
Cost of sales 630 300 70
Gross profit 470 200 60
Administrative expenses 105 150 20
Dividend from Pem 24 - -
Dividend from Rem 6 - -
Profit before tax 395 50 40
Taxation 65 10 20
Profit after tax 330 40 20
Interim Dividends 50 10 -
Proposed Dividends 150 20 10
Profit for year 130 10 10
Reserves b/f 460 106 30
Reserves c/f 590 116 40
Additional information
i. The issued share capital of the group was: Jem Co 5,000,000 ordinary shares of $1
each, Pem Co 1,000,000 ordinary shares of $2 each and Rem Co 400,000 ordinary
shares of $1 each.
ii. Jem Co purchased 80% of the issued share capital of Pem Co on 1/11/2016. At that
time the revenue reserves of Pem amounted to $56,000.
iii. Jem co purchased 60% of the issued share capital of Rem Co in 1/10/2015. At that
time the revenue reserves of Rem amounted to $20,000
iv. Jem Co recognizes dividends proposed by other group companies in its income
statement.

Required:
In as far as the information permits, prepare a consolidated income statement of the group.