CHAPTER FOUR

CONSOLIDATED FINANCIAL STATEMENTS – Circulate Accounts

1 CONSOLIDATED BALANCE SHEET
The consolidated balance sheet involves adding assets and liabilities of the subsidiary to
those of the holding company while excluding inter-company balances. The following points
need to be considered in preparing the consolidate balance sheets.
i) Good will on consolidation

Good will on consolidation arises when the purchase consideration paid by the holding
company is different from the value of the net assets acquired in the subsidiary company.

If purchase consideration is more than net assets acquired, then the difference is positive
goodwill and if purchase considered is less than net assets acquired, then the difference is
negative goodwill.

Goodwill will thus be computed in the following two ways;

Method 1

£ £
Cost of investment in subsidiary xx
less:
Ordinary share capital of subsidiary x
Capital reserves or date of acquisition x
Revenue reserves (retained profits) on date of acquisition x
Shareholders’ funds on date of acquisition xx
Holding company shares acquired (x)
GOODWILL POSITIVE/NEGATIVE xx

Method 2

£
Cost of investment in subsidiary xx
Less: share of net assets acquired (on date of acquisition) (x)
xx/(xx)

NOTE : Total assets less total liabilities i.e. net assets is the same as shareholders funds. The
most common approach used in computing goodwill is by preparing an account called
cost of c-ontrol whereby the cost of investment is posted on the debit side and the
holding company share of the ordinary share capital, capital reserves and revenue
reserves on the date of acquisition in the subsidiary company are posted on the credit
side. The balancing figure in that account is goodwill.
ii) Minority interest (MI)

When the holding company owns less than 100% of the ordinary share capital of the
subsidiary company then the other balance is held by minority interest. Therefore if the
holding company owns 80% of the ordinary share capital of the subsidiary then the minority
interest owns 20%. The minority interest (M.I) should be shown separately in the
consolidated balance sheet but as part of shareholders funds and the figure to appear in the
balance sheet will be made up of the following.

-Minority interest share of the ordinary share capital in subsidiary on balance sheet date
-Minority interest share of capital reserves in subsidiary company on balance sheet date
-Minority interest share of revenue (retained profits) in subsidiary company on balance sheet
date.

Alternatively, the total due to the minority interest can be prepared by opening the Minority
Interest account whereby the Minority interests share of the osc, capital reserves and retained
profits in subsidiary company is posted to the credit side.

iii) Group retained profits

Retained profits ideally should be the amounts that can be distributed as dividends.
Therefore, in arriving at group retained profits, careful attention should be paid to the profits
of the subsidiary company. all the profits of the holding company can be distributed or are
distributable.

However, the subsidiaries profits belong to both the holding company and the minority
interest. Thus the share that belongs to the minority interest will be transferred to the
Minority interest’s account.

The remaining profits that belong to the holding company should be split between pre-
acquisition profits and post acquisition profits.

The pre acquisition profits are the profits in the subsidiary company on the date of
acquisition and are thus used in computing goodwill.

The post acquisition profits relate to the period after acquisition and can thus be distributed
or can be paid out to the shareholders of the holding company. They should thus form part of
the group retained profits.

In summary, the group-retained profits are made up of: -

£
Holding company’s retained profits x
 Add: Holding company’s share of post acquisition retained profits in subsidiary x
company
xx

iv) Preference share capital in subsidiary (irredeemable)

Investment in preference shares does not lead to ownership and therefore, if the holding
company owns part of the preference share capital in subsidiary company then, the
percentage will not be the basis of consolidation.

However, the asset of investment in preference shares and the percentage of preference
shares acquired will still be used to compute goodwill arising on consolidation.

The other balance sheet is due to the minority interest and will thus be included as part of
total due to minority interest or posted to credit side of minority interest account.

v) Loan stock in subsidiary

The holding company may also invest in the loan stock of the subsidiary company or part of
the loan stock of the subsidiary company. The cost of the loan stock to the holding company
will not be used to compute goodwill but instead should cancel out with the liability
appearing in the subsidiary company such that in the consolidated balance sheet, only the
loan stock held by 3rd parties in the group will appear.

Group loan stock will thus be given as follows: -

£ £
Loan stock appearing holding company balance sheet x
Add: Loan stock appearing in subsidiary company balance x
sheet
Less: Loan stock of subsidiary company held b holding (x)
company
Group loan stock x

Steps in preparing the consolidated balance sheet

Step 1

Prepare the 3 important accounts i.e. - cost of control to determine goodwill

- Group retained profits
- Minority interest
Step 2
Add the assets and liabilities of the subsidiary company to those of the holding company noting
the following:
a) The investment in subsidiary company appearing in the holding company balance sheet will
be excluded from the consolidated balance sheet and instead we will have goodwill on
consolidation.
b) The ordinary share capital and preference share capital in consolidated balance sheet will
only be that of the holding company. This is because the share capital of the holding
company and the subsidiary is split between the cost of control (holding companies share)
and the Minority interest.
c) The group retained profits will be the balance appearing in the group retained profits account
and group capital reserves should also be completed the same way company group retained
profits. (This means that group capital reserves will be made up of the holding company’s
capital reserves plus holding companies share of post acquisition capital reserves in
subsidiary).
d) The minority interest will be shown as part of shareholders funds in consolidated balance
sheet but this is after getting the sub-total of the ordinary share capital, preference-share
capital, group capital reserves and group retained profits.

Example:

H Ltd owned S Ltd since the date of incorporation of S Ltd. The balance sheets of the two
companies
as at 31 December 20X2 is as follows.

H Ltd S Ltd
Non Current assets £ £ £ £
Tangible - PPE 35,000.00 45,000.00
Investment in S Ltd 45,000.00
80,000.00 45,000.00
Current assets
Inventory 16,000.00 12,000.00
Accounts receivables 8,000.00 9,000.00
Cash at bank 1,000.00 25,000.00 - 21,000.00
TOTAL ASSETS 105,000.00 66,000.00

Share Capital 70,000.00 40,000.00

Retained profits 11,000.00 19,000.00
81,000.00 59,000.00

Non Current
Liabilities
10% Loan Stock 10,000.00 -

Current Liabilities
 Bank Overdraft - 3,000.00
Accounts Payable 14,000.00 14,000.00 4,000.00 7,000.00
105,000.00 66,000.00

Required;
Prepare the consolidated balance sheet of H Ltd and S Ltd as at 31 December 20X2

Solution

Consolidate Balance Sheet of H and S Ltd.. As at 31 December 20x2

NON-CURRENT ASSETS £ £
Property, plant and equipment (35+45) 80,000
Goodwill 5,000
85,000

CURRENT ASSETS
Inventory (16+12) 28,000
Accounts receivable(8+9) 17,000
Cash at bank 1,000 46,000
TOTAL ASSETS 131,000
Ordinary share capital 70,000
Retained profits 30,000
100,000

NON-CURRENT LIABILITIES
10% Loan stock 10,000

CURRENT LIABILITIES
Bank overdraft 3,000
Accounts payables 18,000 21,000
TOTAL EQUITY AND LIABILITIES 131,000

WORKINGS

NOTE:

H owns S Ltd. since date of incorporation thus:

It owns 100% of S Ltd.. (No minority interest)

There are no pre-acquisition profits (all the profits of share capital are distributable)
 Cost of control
£ £
Investment in S 45,000 OSC (40,000 x 100%) 40,000
_____ Goodwill (balance figure) 5,000
45,000 45,000

Group retained profits

£ £
Balance c/d 30,000 H Ltd.. 11,000
_____ S Ltd.. 19,000
30,000 30,000

Example
Set out below are the draft balance sheets of H Ltd and it's subsidiary S Ltd as at 31 December 20X2.

H Ltd S Ltd
Non Current assets £ £ £ £

Tangible - PPE 50,000.00 40,000.00

Inv. S Ltd OSC 12,000.00

PSC 10,000.00

Loan Stock 5,000.00 27,000.00

77,000.00 40,000.00
Current assets

Inventory 12,000.00 10,000.00

Accounts receivables 8,000.00 4,000.00

Cash at bank 3,000.00 23,000.00 2,000.00 16,000.00

TOTAL ASSETS 100,000.00 56,000.00

Share Capital OSC 50,000.00 30,000.00

PSC 10,000.00 12,000.00

Retained profits 20,000.00 4,000.00

80,000.00 46,000.00

Non Current Liabilities

10% Loan Stock 10,000.00 6,000.00

Current Liabilities

Accounts Payable 10,000.00 4,000.00

100,000.00 56,000.00

Additional information:
H Ltd acquired 60 % of the Ordinary Share capital of S Ltd when the retained profits
Amounted to £1,000, 40% of the Preference Share Capital and part of the 10% loan
Stock.

Required :
Prepare the consolidated balance sheet of H Ltd and it's Subsidiary S Ltd as at 31 December 20X2

Solution

H Ltd.. And its subsidiary

NON-CURRENT ASSETS £ £
Tangible PPE 90,000
Goodwill (1,400)
88,600

CURRENT ASSETS
Inventory 22,000
Accounts receivables 12,000
Cash at bank 5,000 39,000
127,600

Ordinary share capital 50,000

Preference share capital 10,00
Retained profits 21,800
81,800
Minority interest 20,800
Shareholders funds 102,600
NON-CURRENT LIABILITIES
10% loan stock 11,000

CURRENT LIABILITIES
Accounts payables 14,000
127,600
Workings:

Group retained profits

£ £
C.O.C – P & L at Acquisition 600 H. Ltd.. 20,000
Minority interest in S 1,600 S Ltd.. 4,000
Balance c/d 21,800 _____
24,000 24,000

Group Loan Stock

£ £
43Investment S – Loan 5,000 H Ltd.. 10,000
Balance c/d 11,000 S. Ltd. 6,000
21,000 21,000

Cost of control
£ £
Investment in S – O.S.C 12,000 O.S.C (60% x 18,000
30,000)
P.S.C 10,000 P.S.C (40% x 4,800
12,000)
Goodwill 1,400 P & L (60% x 1,000) 600
23,400 23,400

Minority interest
£ £
Balance c/d 20,800 O.S.C (40% x 12,000
130,000)
P. S. C (60% x 7,200
12,000)
_____ P & L (40% x 4,000) 1,600
20,800 20,800
Group retained profits is made up of:-

£
H. Ltd. 20,000
H. Ltd.. Share of post acquisition profits in S (60% x (4,000 1,800
– 1,000)
21,800

Example
H Ltd Acquired S Ltd a few years ago when the Capital and Retained profits stood at
£5,000 and £6,000 respectively.

The following balance sheets relate to the two companies as at 30 June 20X3.

H Ltd S Ltd
Non Current assets £ £ £ £
Tangible - PPE 50,000.00 40,000.00
20,000 Ordinary shares in S Ltd 30,000.00
80,000.00 40,000.00
Current assets
Inventory 3,000.00 8,000.00
Accounts
receivables 20,000.00 17,000.00
Cash at bank 2,000.00 25,000.00 - 25,000.00
TOTAL ASSETS 105,000.00 65,000.00

Ordinary Shares of £1 each 45,000.00 25,000.00

Capital Reserves 12,000.00 5,000.00
Retained profits 30,000.00 23,000.00
87,000.00 53,000.00

Current Liabilities

Accounts Payable 18,000.00 12,000.00

105,000.00 65,000.00

Required :
Prepare the consolidated balance sheet of H Ltd and it's Subsidiary S Ltd as at 30 June 20X3
Solution

H Ltd. And Its Subsidiary

Consolidated Balance Sheet as at 20 June 20x3
£ £
NON-CURRENT ASSETS
Tangible – PPE 90,000
Goodwill 1,200
91,200

CURRENT ASSETS
Inventory 11,000
Receivables 37,000
Cash at bank 2,000 50,000
141,200

Ordinary share capital 45,000

Capital reserves 12,000
Retained profits 43,600
100,600
Minority interest 10,600
Shareholders funds 111,200

CURRENT LIABILITIES
Payables 30,000
141,200

Group retained profits

£ £
P & L at acquisition 4,800 H. Ltd. 30,000
Minority interest 4,600 S. Ltd. 23,000
Balance c/d 43,600
53,000 53,000

Group capital reserves

£ £
C.O.C capital reserves at 4,000 H. Ltd. 12,000
acquisition
M I ‘s share of P&L in S 1,000 S. Ltd. 5,000
Balance c/d 12,000 _____
17,000 17,000

Remember that the holding company has bought 20,000 shares out of the 25,000 shares that the
subsidiary company has issued. Therefore the percentage acquired is 80%.

Cost of control
£ £
Investment in S 30,000 O.S.C (80% x 20,000
25,000)
Capital (80% x 4,000
5,000)
P & L (80% x 6,000) 4,800
_____ Goodwill 1,200
30,000 30,000

Minority interest
£ £
Balance c/d 10,600 O.S.C (20% x 5,000
25,000)
P. S. C (20% x 1,000
5,000)
_____ P & L (20% x 4,600
23,000)
10,600 10,600