FA – Preparing Simple Consolidated

Financial Statements
Contents
Groups and the Consolidated Statement of Financial Position .................................................. 2
Definition of group and control: .............................................................................................. 2
Associate: ................................................................................................................................. 2
Preparing simple consolidated Statement of Financial Position:............................................ 2
The Consolidated Statement of Profit or Loss ............................................................................ 9
Definition of the group and associate: .................................................................................... 9
Groups and Mid-Year Acquisitions ............................................................................................ 12
Net assets: ............................................................................................................................. 12
Consolidated P&L: ................................................................................................................. 13

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Groups and the Consolidated Statement of Financial Position
Definition of group and control:

IFRS 10: A group exists where one company controls another company. A control means that
the parent company has the ability to control the operations and strategies of the subsidiary
company and also has the right to receive variable returns from the subsidiary.

Indicators of control include:

1. Parent owns more than 50% of the ordinary shares in the subsidiary company;

2. Parent has command or power over the subsidiary.

Associate:

IAS 28: A company is deemed to be an associate if the parent company has significant
influence (but not control) over the associate. A parent company has significant influence when
it owns between 20% and 50% of the associate’s ordinary shares.

Preparing simple consolidated Statement of Financial Position:

Basic principle: Add together the figures in the parent and subsidiary companies’ individual
statements of financial position.

Adjustments are:

1. Calculate goodwill (replace parent’s investment figure);

2. Show reserves for non-controlling interest;

3. Share capital and share premium figures are from parent SFP only;

4. Do not include associates.

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Example:

Statement of financial positions

Parent Subsidiary
80% ordinary shares
($) ($)

Non-current
assets:

Buildings, plant,
X ADD X
etc.

Investment in S X Replaced by goodwill -

Current assets X ADD (remove intercompany debt) X

Total Assets X X

Ordinary share
X Parent’s figure ONLY X
capital

Parents 100% balance + post-acquisition for

Retained earnings X X
subsidiary, insert NCI reserves

X X

Non-current
X ADD X
liabilities

Current liabilities X ADD (remove intercompany debt) X

Total equity and

X X
liabilities

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Workings:

1. Goodwill calculation:

Description $

Book value of net assets in S at time of purchase X

Fair value adjustment (IFRS 13) X/(X)

Fair value of net assets at time of purchase X

Purchase price (X)

Goodwill X

Example:

If the net assets had a book value of $250,000 at the date of acquisition but we know that one
of the buildings in the subsidiary’s books is actually worth $15,000 more than its book value we
would increase the value of the net assets up to ($250,000 + $15,000 =) $265,000 to reflect this
fair value adjustment. If we then assume that the parent company paid $500,000 for the
subsidiary this will give rise to a goodwill figure of:

Description $

Book value of net assets in S at time of purchase 250,000

Fair value adjustment (IFRS 13) 15,000

Fair value of net assets at time of purchase 265,000

Purchase price (500,000)

Goodwill 235,000

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 2. Group retained earnings:

Description $

Subsidiary’s closing retained earnings X

Subsidiary’s retained earnings at acquisition (X)

Post-acquisition retained earnings X

Multiply by ownership %

Post-acquisition share of parent X

The post-acquisition share of parent is added with the parent’s closing retained earnings to
arrive at group’s retained earnings.

Example:

If S’s retained earnings are now $30,000 and they were just $22,000 when P acquired S the
retained earnings generated after acquisition are $8,000 and with an 80% ownership this
means that the group retained earnings will include $6,400 from the subsidiary plus 100% of P’s
retained earnings at the reporting date:

Description $

Subsidiary’s closing retained earnings 30,000

Subsidiary’s retained earnings at acquisition (22,000)

Post-acquisition retained earnings 8,000

Multiply by ownership 80%

Post-acquisition share of parent 6,400

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This share of $6,400 will be added in P’s retained earnings to arrive at the group’s rationed
earnings.

3. Non-controlling interest (NCI):

At acquisition ($) At reporting date ($)

Share capital X X

Share premium X X

Revaluation reserve X X

Retained earnings X X

Total (A) Total (B)

Formula:

FV of NCI at acquisition X

Add: NCI share of post-acquisition reserves [(B – A) x NCI%] X

Non-controlling interest (NCI) X

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Example:

If the share capital has risen from $168,000 to $188,000, the share premium from $25,000 to
$50,000 and the retained earnings from $22,000 to $30,000 we can see that the equity and
reserves as a whole have increased by $53,000 since acquisition. If the share of non-controlling
interest is 20%, we can add the resulting $10,600 to the opening fair value of the net assets
(assuming they are of $265,000) to give us:

At acquisition ($) At reporting date ($)

Share capital 168,000 188,000

Share premium 25,000 50,000

Revaluation reserve - -

Retained earnings 22,000 30,000

215,000 268,000

FV of NCI at acquisition $265,000

Add: NCI share of post-acquisition reserves [(268,000 –

$10,600
215,000) x 20%]

Non-controlling interest (NCI) $275,600

The figure of $275,600 will go onto the consolidated statement of financial position.

Intercompany trading:

When we consolidate the accounts of parent and subsidiary we need to make sure that we
remove intercompany sales and purchases transactions and also remove any remaining
receivables and payables outstanding and included in the individual company books for parent
and subsidiary.

Example:

Let’s say that the parent company sells goods to the subsidiary for $2,000; in the individual
company accounts this will generate a sale and a purchase and also an increase to both

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receivables and payables. As a group though there is no sale, the goods have not left the group
and no profit has been generated through the sale from a group perspective. This means that
when we consolidate the accounts of P and S we need to make sure that we remove the
original sale and purchase and also remove any remaining debt outstanding and included in the
individual company books for P and S.

We do this by simply reducing the receivables figure in P and the payables figure in S before
adding the balances together.

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The Consolidated Statement of Profit or Loss
Definition of the group and associate:

Group: Parent + Subsidy(ies)

Subsidy Associate

Parent has control Significant influence (not control)

Usually > 50% of ordinary shares 20% – 50% ordinary shares

Associates are excluded from groups

Baisc principle of consolidation of statement of profit or loss:

Parent Subsidiary
($) ($)

Remove intercompany
Revenue X ADD X 
balances

Remove intercompany
Cost of sales (X) ADD (X) 
balances

Gross profit X X

Expenses (X) ADD (X)

Profit before tax X X

Tax (X) ADD (X)

Profit after tax X X

Group share of net profit (@

% of ownership)

Non-controlling interest (NCI)

(@ % of NCI)

Intercompany trading:

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Group revenue = Parent’s revenue + Subsidiary’s revenue – Intercompany sales

Group cost of sales = Parent’s CoS + Subsidiary’s CoS – Intercompany sales + Unrealised profit

Example:

Let’s assume that the parent company has sold goods to the subsidiary for $2,000 this creates a
sale in the books of P and a purchase in the books of S but from a group’s perspective there has
neither been a sale nor a purchase as the goods are still within the group. This means that on
consolidation we need to remove the sale altogether and we do this by reducing the combined
revenue by the $2,000 sales value and also reducing the combined cost of sales figure by
$2,000; remember this $2,000 is the purchase cost to S as well as the sales revenue for P. The
group gross profit figure will be the same as it was before the adjustment but the consolidated
revenue and cost of sales figures will each have dropped by the intra-group sales revenue
figure.

The other thing we need to think about when goods are sold within the group is the fact that
the selling company may well have made a profit on the intra-group sale.

Let’s assume that P paid $1,500 for the goods it then sold to S for $2,000; this means that P will
have recorded a profit on the sale of $500. It is correct to record this profit in the individual
company accounts of P but from a group’s perspective, at the point of selling the goods to S
there is no profit, as we have already removed the intra-group sale from the consolidated
accounts.

Let’s now assume that S has sold half of the goods it bought from P to an external or third
party; these goods have now generated a true profit from a group’s perspective as the goods
have left the group and revenue from a third party has been received. However, the other
$1,000 worth of inventory in S’s books includes $250 of unrealised group profit and this should
be removed on consolidation, we do this by increasing the consolidated cost of sales figure by
$250 and thereby reducing the consolidated gross profit by $250. It should be noted that this
$250 would be included within P’s gross profit figure and therefore the consolidation
adjustment we are making is to effectively remove it from P’s books before adding P and S’s
cost of sales together.

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Non-controlling interest (NCI):

NCI: Percentage of ordinary shares held by other investors.

NCI share calculation:

1. Calculate: Subsidiary’s profit after tax x NCI%.

2. If unrealired profit (URP) in subsidiary’s accounts exists: Deduct URP from profit after
tax before calculating NCI.

3. Group share: balancing figure.

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Groups and Mid-Year Acquisitions
So far we have assumed that the subsidiary was acquired at the end of a year. Let’s consider
the possibility of a mid-year acquisition and how to deal with such a situation.

We need to think about the impact on the subsidiary’s net assets at the date of acquisition, as
this will impact on the calculation for goodwill, the calculation for the non-controlling interest’s
share of reserves and the calculation for post-acquisition reserves, which is then used to find
the total group reserves figure. All of these figures will ultimately appear on the consolidated
statement of financial position.

We also need to think about how a mid-year acquisition impacts on the revenues, costs and
profits we can record within the consolidated statement of profit or loss.

Net assets:

We will need to calculate net asset figure as we will not have it in the financial statements:

Net assets at acquisition = Opening net assets + Net profit to the date of acquisition

Net profit to the date of acquisition = Net profit for the year x n/12 (n = months up to the
acquisition)

NOTE:

Assume (unless stated otherwise) that profits accrue evenly throughout the accounting period.

Net asset figure is used in a number of calculations such as goodwill, the non-controlling
interest’s share of reserves and the group share of reserves.

Example:

Let’s assume that P acquired 80% of the ordinary shares in S on the 1 st September 20X6 and
that in the accounting period ending the 31st December 20X6, S generated a net profit for the
year of $24,000. The net profit generated in the period up to the 1st September would be
($24,000 x 8/12 =) $16,000. If the opening net assets of S at the 1 st January 20X6 were
$250,000, then the net assets at the date of acquisition would be ($250,000 + $16,000 =)
$266,000. We would then need to make any fair value adjustments as necessary to ensure that
the net assets are recorded at their fair value and not their book value.

We need to be careful with dates when dealing with mid-year acquisitions, it would have been
easy to assume that the pre-acquisition period in this example was 9 months (as the acquisition

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date is September) but as it is the 1st September, the pre-acquisition period is actually 8 months
(from January through to the end of August).

Consolidated P&L:

Revenue
x n/12 + Parent’s figures = Consolidated P&L
Cost of sales

Expenses

Tax

NOTE: Assume (unless stated otherwise) all revenue and expense accrue evenly over the time.

Intercompnay trading:

We need to make sure that we take into consideration any intercompany or intra-group trading
that has happened after the date of acquisition:

Adjust for intercompany trading:

Revenue
x n/12 + Parent’s figures   Decrease Revenue for sale;
Cost of sales  Decrease CoS for sale;
 Increase CoS for PURP.

NCI’s share of profit:

Description $

Subsidiary’s profit for the year x n/12 X

Unrealised profit in subsidiary Y

Total (X – Y) x NCI%

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