GROUP STATEMENT OF PROFIT AND LOSS

Basic consolidation

Example 1 – Basic consolidation

Keswick Co acquired 80% of the share capital of Derwent Co on 1 June 20X5.
The summarised draft statements of profit or loss for Keswick Co and Derwent Co for the year
ended 31 May 20X6 are shown below:
Keswick Derwent
K000 K000

Revenue 8,400 3,200

Cost of sales (4,600) (1,700)
Gross profit 3,800 1,500
Operating expenses (2,200) (960)
Profit before tax 1,600 540
Tax (600) (140)
Profit for the year 1,000 400

Required
Prepare the Keswick group consolidated statement of profit or loss for the year ended 31 May
20X6.

Solution
Group
K’000
Revenue (8,400 + 3,200) 11,600
Cost of sales (4,600 + 1,700) (6,300)
Gross profit 5,300
Operating expenses (2,200 + 960) (3,160)
Profit before tax 2,140
Taxation (600 + 140) (740)
Profit for the year 1,400
Profit attributable to:
Equity shareholders (β) 1,320
Non-controlling interest (20% x 400) 80

Example – Basic consolidation (mid-year acquisition)

Statements of profit or loss for the year-ended 31 December 20X5
Vader Maul
K’000 K’000
Revenue 1,645 1,280
Cost of sales (1,205) (990)
Gross profit 440 290
Distribution costs (100) (70)
Administrative expenses (90) (50)
Profit before interest and tax 250 170
Finance costs (55) (30)
Investment income 10
Profit before tax 205 140
Taxation (35) (28)
Profit for the year 170 112

Additional information:
1. On 1 July 20X5, Vader acquired 80% of the equity shares of Maul. It is the group policy to
measure the non-controlling interest at acquisition at fair value.
2. Assume that the profits accrue evenly.

Required
Prepare a consolidated statement of profit or loss for the Vader group for the year-ended 31
December 20X5

Solution
Vader
K’000
Revenue (1,645 + (6/12 x 1,280)) 2,285
Cost of sales (1,205 + (6/12 x 990)) (1,700)
Gross profit 585
Distribution costs (100 + (6/12 x 70)) (135)
Administrative expenses (90 + (6/12 x 50) (115)
Profit before interest and tax 335
Finance costs (55 x (6/12 x 30)) (70)
Investment income 10
Profit before tax 275
Taxation (35 + (6/12 x 28)) (49)
Profit for the year 226
Profit attributable to:
Equity shareholders (β) 214.8
Non-controlling interest = 20% x (6/12 x 112) 11.2

Adjustments to Group Financial Statements

1. Intra-company balances
 Remove the payable
 Remove the receivable

2. Cash in transit
 Step 1 Deal with cash in transit first (adjust receiver’s books to assume they have
recorded the cash)
  Step 2 Remove the intra-company trade receivable and payable

Illustration
P has an intra-company trade receivable of K1,500 at the year-end due form S. This does not
agree with the corresponding K1,000 trade payable in S due to a cheque of K500 sent by S
immediately prior to the year end, which P did not receive until after the start of the new
accounting year.

To account for the cash in transit and intra-company balances we need to:

1) Record the cash in transit in the group accounts

DR Bank K500
CR Receivables K500

2) Eliminate the equal intra-company balances

DR Payables K1,000
CR Receivables K1,000

3. Inventory in transit
Dr Inventory (SFP) X
Cr Payables (SFP) X

4. Unrealised profits
Inventory PUP - Need to remove the intra-group profit included in inventory held @ year-
end (cost structures)

Cr Inventory (SFP) X
Dr Retained earnings (of seller) X

5. Non-current asset PUP

Need to remove the intra group profit on intra -company transfers of non-current assets
Cr PPE (CSFP) X
Dr Retained earnings (of seller) X

If S is seller → Adjust (W2)

If P is seller → Adjust (W5)

Illustration – Non-current assets PUPs

A parent company sold an item of PPE for K250,000 to its subsidiary on the last day of the
reporting period, when its carrying value was K200,000.

The intra-group profit of K50,000 needs to be removed so that the PPE is held at the carrying
value to the group of K200,000. An adjustment would be required as follows:

DR Retained earnings (parent – (W5)) K50,000

CR PPE (CSFP) K50,000
6. Fair value adjustments (IFRS 3)
Bring in FV of identifiable assets and liabilities on a line-by-line basis into the group SFP
(PPE, inventory, contingent liabilities)

Adjust S’s net assets (W2) @ SFP date and @ acquisition column.
Adjust S’s net assets (W2) @ acqn column (extra depn, sale of inventory)

Illustration – Fair value adjustment (PPE)

A parent company acquires a subsidiary at the start of the reporting period, where the fair
value of the PPE is K50,000 higher than its book value and the remaining life of the PPE is
10 years.
The fair value adjustment is recorded within the workings at the end of the first year as
follows:

(W2) Net assets of the subsidiary

At reporting at acquisition Post

Date Date Acquisition

Equity shares X X
Ret. earnings X X
FV (PPE) 50 50
Extra depn. (5)
X X X

And the fair value is also reflected on the face of the statement of financial position as
follows:
Non-current assets
K000s
Property, plant and equipment (100% P + 100% S + 50 – 5) X

Illustration

On 1 April 20X8, Petros acquired 60% of the equity share capital of Sepo for K9.6m Below are
the summarised draft financial statements of both companies.

STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X8

Petros Sepo
K'000 K'000

Revenue 85,000 42,000

Cost of sales (63,000) (32,000)
Gross profit 22,000 10,000
Distribution costs (2,000) (2,000)
 Administrative expenses (6,000) (3,200)
Finance costs (300) (400)
Profit before tax 13,700 4,400
Income tax expense (4,700) (1,400)
Profit for the year 9,000 3,000

STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X8

Petros Sepo
Assets K'000 K'000
Non-current assets
Consideration in Sepo 9,600
Property, plant and equipment 40,600 12,600
Current assets 16,000 6,600
Total assets 66,200 19,200
Equity and liabilities
Equity shares of K1 each 19,600 4,000
Retained earnings 35,400 6,500
55,000 10,500
Non-current liabilities
10% loan notes 3,000 4,000
Current liabilities 8,200 4,700
Total equity and liabilities 66,200 19,200

The following information is relevant.

i. At the date of acquisition, the fair values of Sepo's assets were equal to their carrying
amounts with the exception of an item of plant, which had a fair value of K2 million in
excess of its carrying amount. It had a remaining life of five years at that date (straight-line
depreciation is used). Sepo has not adjusted the carrying amount of its plant as a result of the
fair value exercise.
ii. Sales from Sepo to Petros in the post-acquisition period were K8 million. Sepo made a mark-
up on cost of 40% on these sales. Petros had sold K5.2 million (at cost to Petros) of these
goods by 30 September 20X8.
iii. Other than where indicated, profit or loss items are deemed to accrue evenly on a time basis.
iv. Sepo's trade receivables at 30 September 20X8 include K600,000 due from Petros which did
not agree with Petros's corresponding trade payable. This was due to cash in transit of
K200,000 from Petros to Sepo. Both companies have positive bank balances.
v. Petros has a policy of accounting for any non-controlling interest at full fair value. The fair
value of the non-controlling interest in Sepo at the date of acquisition was estimated to be
K5.9 million.

Required
a) Prepare the consolidated statement of profit or loss for Petros as at 30 September 20X8.
b) Prepare the consolidated statement of financial position for Petros as at 30 September 20X8.