Professional Documents
Culture Documents
Consolidation PartA
Consolidation PartA
Group
• Many large businesses consist of several companies controlled by one
central or administrative company. Together these companies are called a
group.
• The controlling company, called the parent or holding company, will own
some or all of the shares in the other companies, called subsidiaries
Group
Reasons to operate as a group
• To control size of each company
• For the goodwill associated with the names of the subsidiaries
• For tax or legal purposes
Key Terms
• Control: An investor controls an investee when the investor is exposed, or has
rights, to variable returns from its involvement with the investee and has the
ability to affect those returns through power over the investee.
• Power: Existing rights that give the current ability to direct the relevant activities
of the investee
• Subsidiary: An entity that is controlled by another entity.
• Parent: An entity that controls one or more subsidiaries.
• Group. A parent and all its subsidiaries.
• Associate. An entity over which an investor has significant influence and which is
neither a subsidiary nor an interest in a joint venture.
• Significant influence. The power to participate in the financial and operating policy
decisions of an investee but it is not control or joint control over those policies.
Required accounting
If there are changes to one or more of these three elements of control, then an investor should reassess
whether it controls an investee
Investment in Associate
Key criterion here is significant influence; 'power to participate', but not to 'control’
• Holding 20% or more of voting rights (it can be presumed that the investor has significant
influence over the investee, unless it can be clearly shown that this is not the case)
• Significant influence can be presumed not to exist if the investor holds less than 20% of the
voting power of the investee, unless it can be demonstrated otherwise
The existence of significant influence is evidenced in one or more of the following ways.
(a) Representation on the board of directors (or equivalent) of the investee
(b) Participation in the policy making process
(c) Material transactions between investor and investee
EQUITY METHOD
(d) Interchange of management personnel
(e) Provision of essential technical information
Consolidated Financial Statements
The financial statements of a group in which the assets, liabilities, equity,
income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity
Steps
• Add Parent (P) and Subsidiary (S) Balance sheet
• Eliminate Investment in S
Pre and post acquisition earnings: P acquires 100% of the equity shares of S on 1/1. Net
assets of S were $230,000 at the time and P paid the same amount to buy the shares. Prepare the
consolidated SOFP at 31/12.
P S P S
1/1 1/1 31/12 31/12
Non-current Assets:
PP&E 700,000 200,000 710,000 285,000 995,000
Investment in S 230,000 - 230,000 -
930,000 200,000 940,000 285,000
Current Assets 120,000 100,000 170,000 80,000 250,000
1,050,000 300,000 1,110,000 365,000 1,245,000
Equity:
Equity shares of $1 each 200,000 40,000 200,000 40,000 200,000
Share Premium 300,000 100,000 300,000 100,000 300,000
Retained Earnings 370,000 90,000 400,000 160,000 470,000 (*)
870,000 230,000 900,000 300,000 970,000
Current Liabilities 180,000 70,000 210,000 65,000 275,000
1,050,000 300,000 1,110,000 365,000 1,245,000
Steps
• Add Parent (P) and Subsidiary (S) Balance sheet
• Eliminate Investment in S
• Eliminate intra group balances
For e.g Trade receivables and payables cancel each other
Intra Group trading:P regularly sells goods to its one subsidiary company, S , which it has owned since S's
incorporation. Prepare SoFP at 31/12.
P S
31/12 31/12
Non-current Assets:
PP&E 35,000 45,000 80,000
Investment in S 40,000 -
75,000
Current Assets
Inventory 16,000 12,000 28,000
Trade Receivable S 2,000
Other 6,000 9,000 15,000
Cash & Cash Equi 1,000 1,000
100,000 66,000 124,000
Equity:
Equity shares of $1 each 70,000 40,000 70,000
Retained Earnings 16,000 19,000 35,000 R.E of S at
inception are 0
86,000 59,000 105,000
Current Liabilities
Bank Overdraft 3,000 3,000
Trade & Other pay 14,000 To P 2,000 16,000
Other 2,000
100,000 66,000 124,000
Consolidation
Example 4
• 100% ownership
• The inter-company trading balances may be out of step because of goods or cash in transit.
• One company may have issued loan stock of which a proportion only is taken up by the other
company
Steps
• Add Parent (P) and Subsidiary (S) Balance sheet
• Eliminate Investment in S
• Procedure is to cancel inter company balances as far as possible.
• The remaining uncancelled amounts will appear in the consolidated statement of financial
position.
• Uncancelled loan stock will appear as a liability of the group.
• Uncancelled balances on intra-group accounts represent goods or cash in transit, which will
appear in the consolidated statement of financial position
P S
31/12 31/12
Non-current Assets:
PP&E 120,000 100,000 220,000
Investment in S 80,000 -
80,000 ordinary shares of $1 each 20,000
$20,000 of 12% loan stock in S
220,000
Current Assets
Inventory 50,000 60,000 110,000
Trade Receivable 40,000 30,000 70,000
Current account with S/(Cons statement Good in transit) 18,000 6,000
Cash 4,000 6,000 10,000
332,000 196,000 416,000
Equity:
Equity shares of $1 each 100,000 80,000 100,000
Retained Earnings 95,000 28,000 123,000
195,000 108,000 223,000
Non Current Liabilities
10% loan stock 75,000 75,000
12% loan stock 50,000 30,000 (50,000x60%)
Current Liabilities
Trade and other payable 47,000 16,000 63,000
Taxation 15,000 10,000 25,000
Current account with P 12,000
332,000 196,000 416,000
Consolidation
Example 5
• 100% ownership
• Goodwill arising on acquisition
The amount which P Co records in its books as the cost of its investment in S Co may be more or less
than the carrying amount of the net assets it acquire
Steps
• Add Parent (P) and Subsidiary (S) Balance sheet
• Eliminate Investment in S
• Calculate Goodwill
Consideration transferred X
Net assets acquired as represented by:
Ordinary share capital X
Share premium X
Retained earnings on acquisition X (X)
Goodwill X
ACQUITSITION AT P S CSFP
31/12
31/12 31/12 31/12
Non-current Assets:
Non-current Goodwill 20,000
Assets: Current Assets 100,000
Equity:
Equity shares of $1 each 250,000 100,000 Equity: