EXAMPLE 1 – Consolidation means adding together and cancellation of intra-group transitions

On 1 January 2008, P acquired 100% of the ordinary shares of S, which was incorporated on that
date. On 31 December 2010, the Statements of Financial Position of each of the two companies
were as follows:
P S

Non-current assets 25,000 12,000

Investment in S at cost 10,000
Current assets 8,000 9,000
43,000 43,000

Share capital - $1 shares 25,000 10,000

Retained earnings 15,000 8,000
Current liabilities 3,000 3,000
43,000 21,000

Prepare a consolidated statement of financial position at 31 December 2010 for the P group.

Solution
Workings

W1 Shareholding percentage in a subsidiary (group structure)

Parent 100%
Non-controling interest 0%

Consolidated statement of financial position for P as at 31 December 2010

Non-current assets (25,000 + 12,000) 37,000

Current assets (8,000 + 9,000) 17,000

______
Total assets 54,000
______

Equity and liabilities

Share capital 25,000
Retained earnings 23,000 48,000

Current liabilities (3,000 + 3,000) 6,000

______
Total equity and liabilities 54,000
______

Note:
 - Share capital in the consolidated statement of financial position willl always be that of the
parent company only.
- This is because share capital of the subsidiary is cancelled by the amount of investment in
subsidiary that appears under the non-current assets of the parent company’s statement
of financial positions
- When preparing consolidated statement of financial position, an amount that appears
under the asset section of one company is cancelled against the same amount that
appears in the equity and liability section of another company in a group
- These are called intra group transactions

EXAMPLE 2 – Dealing with subsidiary’s retained earneding (reserves)

P acquired 100% of the share capital of S on 1 January 2006 for $28,000, at which date the retained
earnings of S amounted to $8,000.
At 31 December 2009 companies’ Statement of Financial Position were as follows:

P S

Non-current assets 55,000 25,000

Investment in S, at cost 28,000
Current assets 18,000 14,000
101,000 39,000

Share capital - $1 shares 60,000 20,000

Retained earnings 38,000 15,000
Current liabilities 3,000 4,000
101,000 39,000

Prepare the consolidated Statement of Financial Position at 31 December 2009 for the P group.

Solution
Workings

W1: Shareholding percentage in a subsidiary (group structure)

Parent 100%
Non-controling interest 0%

W2: Group retained earnings

P S
Retained earnings as per questions 38,000 15,000
Less: pre-acquisions retained earnings (8,000)
______
Post acqusition retained earnings 7,000
 ______
Group share (100% x 7,000) 7,000
______
Total group retained earnings 45,000
______

Consolidated statement of financial position for P as at 31 December 2009

Non-current assets (55,000 + 25,000) 80,000

Current assets (18,000 + 14,000) 32,000

______
Total assets 112,000
______

Equity and liabilities

Share capital 60,000
*Retained earnings (w2) 45,000 105,000

Current liabilities (3,000 + 4,000) 7,000

______
Total equity and liabilities 112,000
______

Note:
- Share capital in the consolidated statement of financial position willl always be that of the
parent company only.
- This is because share capital of the subsidiary is cancelled by the amount of investment in
subsidiary that appears under the non-current assets of the parent company’s statement
of financial positions
- When preparing consolidated statement of financial position, an amount that appears
under the asset section of one company is cancelled against the same amount that
appears in the equity and liability section of another company in a group
- These are called intra group transactions

*Subsidiary’s retained earnings need to be splitted between that that have been generated before
acquisitions (pre-acquisition) and those that have been generated after acqusitions.

Pre- Acqusion retained earnings of the subsidiary are subtracted from the total retained earnings
in order to get post acqusition retained earnings.

Only post- acqusitions retained earnings are the ones that are added to the parent company’s
retained earnings (reserves) in order to get the group retained earnings.
EXAMPLE 3 – Non-controlling interest (minority interest)

On 1 January 2008, P acquired 80% of the ordinary shares of S, which was incorporated on that date.

On 31 December 2010, the Statements of Financial Position each of the two companies were as
follows:

P S

Non-current assets 30,000 15,000

Investment in S, at cost 8,000
Current assets 7,000 6,000
45,000 21,000

Share capital - $1 shares 25,000 10,000

Retained earnings 15,000 8,000
Current liabilities 5,000 3,000
45,000 21,000

Prepare the consolidated Statement of Financial Position at 31 December 2010 for the P group.

Solution
Workings

W1: Shareholding percentage in a subsidiary (group structure)

Parent 80%
Non-controling interest 20%

W2: Group retained earnings

P S
Retained earnings as per questions 15,000 8,000
Less: pre-acquisions retained earnings (0) **
______
Post acqusition retained earnings 8,000
______
Group share (80% x 8,000) 6,400
______
Total group retained earnings 21,400
______

W3: Non-controlling interest

Fair value at acquisition (20% x 10,000) 2,000
Plus share of subsidiary post-acquisition retained earnings (20% x 8,000) 1,600
______
Non-controling interest at the end of the year 3,600
 ______

Consolidated statement of financial position for P as at 31 December 2009

Non-current assets (30,000 + 15,000) 45,000

Current assets (7,000 + 6,000) 13,000

______
Total assets 58,000
______

Equity and liabilities

Share capital 25,000
Retained earnings (w2) 21,400 46,400

Non-controlling interest (w3) 3,600

Current liabilities (5,000 + 3,000) 8,000

______
Total equity and liabilities 58,000
______

**Note: that there were no pre-acquisition retained eaarnings for subsidiary because the
subsidiary was acquired on the same date in which is was incorporated (formed).

Also note that post acqusition retained earnings for the subsidiary was shared between the group
(parent co) and non-controlling interest because the subsidiary was not 100% owned by the
parent company.

EXAMPLE 4 – Goodwill

P acquired 60% of the shares in S on 1 January 2007 when the retained earnings of S stood at
$6,000.

The fair value of the non-controlling interest at the date of acquisition was $30,000.

On 31 December 2010, the Statement of Financial Position of each two companies were as follows:

P S

Non-current assets 50,000 30,000

Investment in S, 40,000
Current assets 14,000 12,000
104,000 42,000

Share capital - $1 shares 50,000 20,000

Retained earnings 44,000 16,000
Current liabilities 10,000 6,000
104,000 42,000

Calculate the amount of the goodwill arising on consolidation.

Solution
Shareholding percentage (group structure)
Parent company 60%
Non-controlling interest 40%

Goodwill

Fair value of consideration transferred by the parent company 40,000 60%

Fair value of non-controlling interest at acquisition 30,000 40%
______
Total fair value of consideration 70,000 100%
Less: subsidiary’s net assets at the date of acquision:
Share capital 20,000
Retained earnings 6,000 (26,000) 100%
______ _______
Goodwill 44,0000
_______

EXAMPLE 5 – group retained earnings

Using the information in example 4, calculate the retained earnings for inclusion in the
Consolidated Statement of Financial Position as at 31 December 2010.

Solution
Group retained earnings
P S
Retained earnings as per the question 44,000 16,000
Less: pre-acquisition retained earnings (6,000)
_______
Subsidiary’s post acquisition retained earning 10,000
_______
Group share of subsidiary’s post-acquision
retained earnings (10,000 x 60%) 6,000
______
Group retained earnings 50,000
______
EXAMPLE 6 – Non-controlling interest
Using the same information as in example 4, calculate the non-controlling interest at 31 December
2010.

Solutions
Non-controlling interest
Fairvalue at acquisition 30,000
Pluss share of subsidiary’s post-acquisions retained earnings
(10,000 x 40%) 4,000
______
Non-controlling interest at the end of 2010 34,000
______

EXAMPLE 7
Using the same information in example 4 (and workings from the later examples) prepare the
Consolidated Statement of Financial Position at 31 December 2010 for the P group.

Solution
Consolidated statement of financial position for P as at 31 December 2009
Non-current assets (50,000 + 30,000) 80,000
Goodwill (example 4) 44,000

Current assets (14,000 + 12,000) 26,000

______
Total assets 150,000
______

Equity and liabilities

Share capital 50,000
Retained earnings (example 5) 50,000 100,000

Non-controlling interest (example 6) 34,000

Current liabilities (10,000 + 6,000) 16,000

______
Total equity and liabilities 150,000
______

EXAMPLE 8– Cancellation of intra-group items

Company P has a controlling interest in company S.

Extracts from the statements of financial position of each company individually as at 31 December
2010 are as follows:
 P S
Receivables 50,000 30,000
Payables 35,000 40,000
Included in P’s receivables is $8,000 owing from S. S’s payables include the $8,000 owing to P.
Calculate the total receivables and payables to be shown on the Consolidated Statement of
Finacial Position as at 31 December 2010.

Solutions
Receivables ( 50,000 – 8,000 + 30,000) = 72,000

Payables (35,000 + 40,000 – 8,000) = 67,000

EXAMPLE 9 – cancelation of intra-group items

P acquired share capital of S at cost on its incorporation. The Statement of Financial Position of the
two entities as at 31 December 2010 are as follows:

P S

Non-current assets 50,000 25,000

Investment in S, at cost 13,000

Current assets
Inventory 14,000 7,000
receivables 11,000 6,000
88,000 38,000

Share capital - $1 shares 45,000 20,000

Retained earnings 30,000 16,000

Current liabilities
Payables 13,000 2,000
______ ______
88,000 38,000

During December 2010 S had sold goods to P for $6,000. S sells to P at cost plus 25%.
P had not sold any of these goods and all were therefore included in inventory.
Additionally, P still owes S $2,000 for these goods and therefore this sum is included in P’s payables
and in S’s receivables.

Prepare a Consolidated Statement of Financial Position as at 31 December 2010.

Solution
Workings

W1: Shareholding percentage (Group structure):

Parent company 13,000 shares / 20,000 shares x 100 = 65%
Non-controlling interest (100% - 65%) = 35%

W2: Group retained earning

Retained earnings as per questions 30,000 16,000

Less: pre-acquisions retained earnings (0)
Less: unrealised profit (1,200)*
______
Post acqusition retained earnings 14,800
______
Group share (65%% x 14,800) 9,620
______
Total group retained earnings 39,620
______

W3: Non-controlling interest

Fair value at acquisition (35% x 20,000) 7,000
Plus share of subsidiary post-acquisition retained earnings (35% x 14,800) 5,180
______
Non-controling interest at the end of the year 12,180
______

Consolidated statement of financial position for P as at 31 December 2010

Non-current assets (50,000 + 25,000) 75,000

Current assets
Inventory (14,000 -1,200* +7,000) 19,800
Receivables (11,000 – 2,000* + 6,000) 15,000
_______
Total assets 109,800
______

Equity and liabilities

Share capital 45,000
Retained earnings (w2) 39,620 84,620

Non-controlling interest (w3) 12,180

Current liabilities
(13,000 – 2,000* + 2,000) 13,000
______
Total equity and liabilities 109,800
______

*These are intra-group items and this is how they are being cancelled.

These items are cancelled because when preparing consolidated statements, a group is treated as
one company not two or more companies, so no company can sell or owe money to itself.