Chapter 19

3 Other CSPL adjustments

Impairment of goodwill

Once any impairment has been identified during the year, the charge for the
year will be passed through the consolidated statement of profit or loss. This will
usually be through operating expenses, but always follow any instructions from
the examiner.
If non-controlling interests have been valued at fair value, a portion of the
impairment expense must be removed from the non-controlling interest's share of
profit.
Fair values

If a depreciating non-current asset of the subsidiary has been revalued as part

of a fair value exercise when calculating goodwill, this will result in an
adjustment to the consolidated statement of profit or loss.
The subsidiary's own statement of profit or loss will include depreciation based
on the carrying amount of the asset in the subsidiary's individual statement of
financial position.
The consolidated statement of profit or loss must include a depreciation charge
based on the fair value of the asset, as included in the consolidated SFP.
Extra depreciation must therefore be calculated and charged to an appropriate
cost category (usually cost of sales, but in line with examiner requirements).

Test your understanding 1

Set out below are the draft statements of profit or loss of Prunes and its
subsidiary company Sultanas for the year ended 31 December 20X7.
On 1 January 20X6 Prunes purchased 75,000 of Sultanas’ total share
capital of 100,000 $1 ordinary shares.
Statements of profit or loss for the year ended 31 December 20X7
Prunes Sultanas
$000 $000
Revenue 600 300
Cost of sales (360) (140)
––––– –––––
Gross profit 240 160
Operating expenses (93) (45)
––––– –––––
Profit from operations 147 115
Finance costs – (3)
––––– –––––
Profit before tax 147 112
Income tax expense (50) (32)
––––– –––––
Profit for the year 97 80
––––– –––––

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Consolidated statement of profit or loss

The following additional information is relevant:

(i) During the year Sultanas sold goods to Prunes for $20,000,
making a mark-up of one third. Only 20% of these goods were
sold before the end of the year, the rest were still in inventory.
(ii) Goodwill has been subject to an impairment review at the end of
each year since acquisition and the review at the end of the
current year revealed a further impairment of $5,000. Impairment
is to be recognised as an operating cost.
(iii) At the date of acquisition a fair value adjustment was made and
this has resulted in an additional depreciation charge for the
current year of $15,000. It is group policy that all depreciation is
charged to cost of sales.
(iv) Prunes values the non-controlling interest using the fair value
method.
Prepare the consolidated statement of profit or loss for the year
ended 31 December 20X7 for the Prunes group.

Test your understanding 2

Given below are the statements of profit or loss for Paris and its
subsidiary London for the year ended 31 December 20X5.
Paris London
$000 $000
Revenue 3,200 2,560
Cost of sales (2,200) (1,480)
––––– –––––
Gross profit 1,000 1,080
Distribution costs (160) (120)
Administrative expenses (400) (80)
––––– –––––
Profit from operations 440 880
Investment income 160 –
––––– –––––
Profit before tax 600 880
Taxation (400) (480)
––––– –––––
Profit for the year 200 400
––––– –––––

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 Chapter 19

Additional information:
(i) Paris paid $1.5 million on 31 December 20X1 for 80% of London’s
800,000 ordinary shares.
(ii) Goodwill impairments at 1 January 20X5 amounted to $152,000.
A further impairment of $40,000 was found to be necessary at the
year-end. Impairments are included within administrative
expenses.
(iii) Paris made sales to London at a selling price of $600,000 during
the year. Not all of the goods had been sold externally by the
year-end. The profit element included in London’s closing
inventory was $30,000.
(iv) Additional fair value depreciation for the current year amounted to
$10,000. All depreciation should be charged to cost of sales.
(v) London paid an interim dividend during the year of $200,000.
(vi) Paris values the non-controlling interest using the fair value
method.
Prepare a consolidated statement of profit or loss for the year
ended 31 December 20X5 for the Paris group.

4 Mid-year acquisitions
Mid-year acquisition procedure

If a subsidiary is acquired part way through the year, then the subsidiary’s
results should only be consolidated from the date of acquisition, i.e. the date on
which control is obtained.
In practice this will require:
 Identification of the net assets of S at the date of acquisition in order to
calculate goodwill.
 Time apportionment of the results of S in the year of acquisition. For this
purpose, unless indicated otherwise, assume that revenue and expenses
accrue evenly.
 After time-apportioning S’s results, deduction of post-acquisition intra-
group items as normal.

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