Chapter 8 • Cancellation and part-

cancellation
The consolidated • Goodwill
statement of • Non-controlling interests
• Intra-group trading
financial position
 Syllabus learning outcomes 1
• Describe the components of and prepare a consolidated statement of
financial position or extracts thereof including:
— Fair value adjustments at acquisition on land and buildings (excluding
depreciation adjustments)
— Fair value of consideration transferred from cash and shares
(excluding deferred and contingent consideration)
 Syllabus learning outcomes 2
— Elimination of intra-group trading balances (excluding cash and
goods in transit)
— Removal of unrealised profit arising on intra-group trading
— Acquisition of subsidiaries part way through the financial year
— Calculate goodwill (excluding impairment of goodwill) using the full
goodwill method only.
Overview
Approach to consolidated
statement of financial Mid-year acquisition
position

Consolidated statement of
Financial position

Non-controlling
Goodwill Fair values
interest
intra-group
trading
Other reserves
 Cancellation and part-cancellation 1
Cancellation
When preparing a simple consolidated statement of financial position:
• Take the individual accounts of the parent company and the subsidiary
and cancel out items which appear as an asset in one company and a
liability in another.
• Add together all the uncancelled assets and liabilities throughout the
group.
 Cancellation and part-cancellation 2
Part cancellation
• An item may appear at differing amounts in the parent's and subsidiary's
statement of financial position.
• The subsidiary's shares may have been acquired at a price other than
nominal value, raising the issue of goodwill.
• The parent may not have acquired all of the shares of the subsidiary,
raising the issue of non-controlling interests.
 Goodwill 1
Goodwill
• Goodwill arises when the parent pays more for their investment than the
par value of the shares they acquire.
• Any pre-acquisition reserves of a subsidiary company are not aggregated
with the parent company's reserves in the consolidated statement of
financial position.
• Goodwill is recognised as an intangible asset in the consolidated SOFP.
Goodwill 2
Goodwill working

$ $
Fair value of consideration transferred X
Fair value of NCI at acquisition X
Less net acquisition-date fair value of
identifiable
Assets acquired and liabilities assumed:
Ordinary share capital X
Share premium X
Retained earnings at acquisition X
Fair value adjustments at acquisition X
(X)
Goodwill X
 Non-controlling interests 1
Non-controlling interest
• Shows the extent to which net assets controlled by the group are owned
by other parties.
 Non-controlling interests 2
Non-controlling interest
• SOFP – equity
Fair value of NCI at acquisition X
Plus NCI's share of post acq'n ret'd earnings X
NCI at reporting date X
Non-controlling interests 3

Retained earnings
PCo SCo
$ $
Per question X X
Adjustments (unrealised profit attribute to P Co) (X)
Pre-acquisition retained earnings (X)
Y
Group share of post-acq'n ret'd Earnings S Co (Y × X
%)
Group retained earnings X
 Non-controlling interests 4
Non-controlling interest
• NCI share of retained profits = Y × NCI%
 Intra-group trading 1
Intra-group trading
Unrealised profit will arise on intra-group transactions where the inventory
is still held at the reporting date:
(1) Work out which company made the profit.
(2) Calculate the provision for unrealised profit (PUP).
(3) For consolidation purposes, eliminate the profit from inventory,
consolidated retained earnings and NCI (if required).
 Intra-group trading 2
• If P sells to S, the unrealised profit lies in P's books:

DEBIT Consolidated SPL (whole profit loading)

CREDIT Group inventory
 Intra-group trading 3
• If S sells to P, the unrealised profit lies in S's books and must be shared
between P and the NCI:

DEBIT Consolidated SPL (P's share)

DEBIT Non-controlling interest (NCI's share)
CREDIT Group inventory
 Lecture example 1
• Pogo acquired the entire share capital of Stick for $8m on 1 February 20X0
when the statements of financial position of the two companies were as
follows.
Lecture example 1 (cont'd)
Pogo Stick
$'000 $'000
Investment in Stick 8,000 –
Other assets 9,500 6,500
17,500 6,500

Share capital 9,000 3,000

Retained earnings 6,000 2,000
15,000 5,000
Liabilities 2,500 1,500
17,500 6,500
 Lecture example 1 (cont'd)
Required
Prepare the consolidated statement of financial position of the Pogo
group as at 1 February 20X0.
Answer to lecture example 1
Pogo Group – Consolidated statement of financial position
as at 1 February 20X0

$'000
Goodwill (W2)
Other assets [9,500 + 6,500]

Share capital [Pogo only]

Retained earnings (W3)

Liabilities [2,500 + 1,500]

Answer to lecture example 1 (cont'd)
1 Group structure

Pogo
1.2.X0 100%
Pre-acquisition ret'd earnings $2m
Stick

2 Goodwill
$'000 $'000
Consideration
Non-controlling interest
Net assets at acquisition represented by:
Share capital
Retained earnings

Goodwill arising on acquisition

Answer to lecture example 1 (cont'd)

3 Retained earnings
Pogo Stick
$'000 $'000
Per question
Pre-acquisition retained earnings

Group share of post acquisition earnings:

Stick (0 × 100%)
 Lecture example 2
• Pop acquired 75% of the issued share capital of Snap on 1 January 20X8
when Snap had a retained earnings balance of $1m.
• The fair value of the non-controlling interest at that date was $1.5m.
• One year later the two companies had the following statements of
financial position.
Lecture example 2 (cont'd)

Pop Snap
$'000 $'000
Investment in Snap 6,000 –
Other assets 10,500 9,200
16,500 9,200
Share capital 10,000 4,000
Retained earnings 1,500 2,200
11,500 6,200
Liabilities 5,000 3,000
16,500 9,200
 Lecture example 2 (cont'd)
Required
Produce the consolidated statement of financial position of Pop and its
subsidiary as at 31 December 20X8.
Answer to lecture example 2
Pop Group – Consolidated statement of financial position
as at 31 December 20X8
$'000
Goodwill (W2)
Other assets [10,500 + 9,200]

Share capital [P only]

Retained earnings (W3)

Non-controlling interest (W4)

Liabilities [5,00 + 3,000]

Answer to lecture example 2 (cont'd)
Workings
1 Group structure
Pop
1.1X8 75%
Pre-acquisition ret'd earnings $1m
Snap

2 Goodwill
$'000 $'000
Consideration
Non-controlling interest
Net assets at acquisition represented by:
Share capital
Retained earnings

Goodwill arising on acquisition

Answer to lecture example 2 (cont'd)
3 Retained earnings
Pop Snap
$'000 $'000
Per question
Pre-acquisition retained earnings

Group share of post acquisition earnings:

Snap (1,200 × 75%)

4 Non-controlling interest

NCI at acquisition (W2)

NCI share of post acquisition earnings ((W3) 1,200 × 25%)
 Lecture example 3
X acquired 300,000 of Y's 400,000 $1 ordinary shares on 1 January 20X5
when Y's retained earnings were $500,000. The fair value of the non-
controlling interest in Y at that date was $280,000.
The purchase consideration comprised:
• $250,000 in cash payable at acquisition
• New shares issued in X on a 1 for 3 basis
The quoted price of X's shares on the acquisition date was $7.35.
 Lecture example 3 (cont'd)
The fair value of Y's land and buildings at 1 January 20X5 was $160,000 but
the book value was only $100,000. All other net assets had a fair value
equivalent to their book value.
Required
Calculate the goodwill arising on acquisition of Y.
Answer to lecture example 3
Goodwill
$ $
Fair value of consideration
Cash
Shares [(1/3 × 300,000) × $7.35]

Fair value of non-controlling interest

Les: Fair value of net assets at acq'n
Share capital
Retained earnings
Fair value adjustment

Goodwill at acquisition
Answer to lecture example 3 (cont'd)

Workings
1 Group structure
X
1.1.X5 300/400 = 75%
Pre-acquisition ret'd earnings $500,000
Y
 Lecture example 4
• Poach acquired 60% of the share capital of Steal on its incorporation. The
statements of financial position of the two companies as at 31 December
20X8 are as follows.
Lecture example 4 (cont'd)
Poach Steal
$'000 $'000
Non-current assets
Property, plant and equipment 200 50
Investment in Steal 6
206 50
Current assets
Inventories 22 18
Receivables – from Poach – 30
– other 96 29
Cash 4 15
122 92
328 142
Lecture example 4 (cont'd)

Equity
Share capital 100 10
Retained earnings 147 73
247 83
Current liabilities
Trade payables – to Steal 30 –
– other 51 59
81 59
328 142
 Lecture example 4 (cont'd)
Notes
(i) The fair value of the non-controlling interest in Steal at acquisition
was $4,000.
(ii) Steal sells goods to Poach at a profit margin of 25% on selling price. At
the year end, $12,000 of the goods that Poach had purchased from Steal
remained in inventories.
 Lecture example 4 (cont'd)
Required
Prepare a consolidated statement of financial position as at 31 December
20X8.
Answer to lecture example 4
Poach Group – Consolidated statement of financial position as at 31 December 20X8
$'000
Non-current assets
Property, plant and equipment (200 + 50)

Current assets
Inventories (22 + 18 – (W4) 3)
Receivables – from Poach (30 – 30)
– other (96 + 29)
Cash (4 + 15)

Equity attributable to the owners of the parent

Share capital
Retained earnings (W2)

Non-controlling interest (W3)

Current liabilities
Trade payables – to Steal (30 – 30)
– other (51 + 59)
Answer to lecture example 4 (cont'd)
Workings
1 Group structure
Poach
On incorporation 60% \non-controlling interest 40%
(\no goodwill)
Pre-acquisition ret'd earnings $0
Steal

2 Consolidated retained earnings

Poach Steal
$'000 $'000
Per question
Provision for unrealised profit (PUP) (W4)
Pre-acquisition retained earnings

Group share of post acquisition retained earnings:

Steal (70 × 60%)
Answer to lecture example 4 (cont'd)
3 Non-controlling interest
$'000
NCI at acquisition
NCI share of post acquisition retained earnings ((W2) 70 × 40%)

4 Provision for unrealised profit

 Lecture example 5
• Pat acquired 80% of the issued share capital of Slap on 30 September
20X7. The share price for each of the non-controlling interest shares in
Slap was $4.50 at the acquisition date.
• At the year end 31 December 20X7 the two companies have the following
statements of financial position:
Lecture example 5 (cont'd)
Pat Slap

$'000 $'000 $'000 $'000

Investment in Slap 4,000 –

Other assets 10,500 6,000

14,500 6,000
 Lecture example 5 (cont'd)
Share capital ($1 shares) 6,000 1,000
Share premium – 500
Retained earnings
1 Jan 20X7 4,000 1,500
Profit for 20X7 2,000 1,000
6,000 2,500
12,000 4,000
Liabilities 2,500 2,000
14,500 6,000

Required
Calculate the goodwill at the date of acquisition.
Answer to lecture example 5

$'000 $'000
Consideration transferred
Non-controlling interest (1,000 × 20% ×
$4.50)

Net assets at acquisition as represented by:

Share capital
Share premium
Retained earnings (W2)

Goodwill
Answer to lecture example 5 (cont'd)
Workings
1 Group structure
Pat
30.9.X7 80%
Pre-acquisition ret'd earnings – see W2
Slap

2 Slap – retained earnings 30.9.X7

Retained earnings at 1.1.X7

For the 9 months to 30.9.X7
Retained earnings at 30.9.X7
 Chapter summary 1
1 Approach to consolidated financial position
▪ In the exam, a methodical approach to consolidation is key.
2 Goodwill
▪ Positive goodwill is capitalised as an intangible non-current asset. 'Negative'
goodwill (once reassessed to ensure it is accurate) is recognised as a bargain
purchase in the profit or loss.
3 Fair values
▪ In order for the goodwill figure to be accurately measured, both the
consideration transferred and the fair value of the assets acquired and liabilities
assumed must be recognised at fair value at the date of acquisition.
 Chapter summary 2
4 Other reserves
▪Other reserves, eg a revaluation surplus, are calculated using the same
process as retained earnings, ie only post-acquisition reserve movements are
consolidated.
5 Non-controlling interest
▪ Non-controlling interest shows the amount of the assets and liabilities under
the control of the parent, but which are not owned by the parent's
shareholders.
 Chapter summary 3
6 Intra-group trading
▪ At the year end, intra-group payables and receivables must be
eliminated.
▪ Unrealised profit in year end inventories from intra-group trading must
be eliminated by reducing inventories and the seller's retained earnings.
 Chapter summary 4
7 Mid-year acquisitions
▪ Only post-acquisition profits are consolidated. Therefore, if the acquisition
is mid-year, a retained earnings figure must be estimated for the goodwill
and retained earnings calculations.