Consolidated financial

statements
Part 2
MECHANICS OF CONSOLIDATION
1. ESTABLISH GROUP STRUCTURE
2. NET ASSETS OF SUBSIDIARY
3. GOODWILL
4. NON-CONTROLLING INTEREST
5. GROUP RETAINED EARNINGS
FAIR VALUE OF CONSIDERATION AND
NET ASSETS
FAIR VALUE
 The amount for which an asset could be
exchanged or a liability settled between
knowledgeable, willing parties in an arm’s
length transaction.
 To accurately account for GOODWILL:
◦ Consideration paid (investment) for subsidiary = fair value
◦ Subsidiary’s identifiable assets and liabilities = accounted
for at fair value
FAIR VALUE OF CONSIDERATION AND
NET ASSETS (cont.)
COST:
 DEFFERED CONSIDERATION
◦ Not all purchase consideration paid at the date of
acquisition
◦ Part payment is deferred until a later date = deferred
consideration
◦ Has to be measured at fair value at the acquisition date
◦ To calculate the value of the deferred consideration AT
acquisition date, use the following formula:

Deferred consideration x 1/(1+r)ⁿ = present fair value of

consideration
FAIR VALUE OF CONSIDERATION AND
NET ASSETS (cont.)
Example:
P acquired 60% of S on 1 July 2012 when the retained earnings
of S were N$5800. P paid N$5000 in cash. P also issued 2 N$1
shares for every 5 acquired in S and agreed to pay a further
N$2000 in 3 years’ time. The market value of P’s shares at 1
July 2012 was N$1.80. P has only recorded the cash paid in
respect of the investment in S. Current interest rates are 6%. S’s
share capital is N$5 000 (5 000 shares N$1 par value)
FAIR VALUE OF CONSIDERATION AND
NET ASSETS (cont.)
Solution:
Cost (cash) 5 000
Shares 2 160
(5 000 x 60% x 2/5 x N$1.80)
Deferred consideration 1 680
(2 000 x (1/1.06)³)
TOTAL CONSIDERATION 8 840
FAIR VALUE OF CONSIDERATION AND
NET ASSETS (cont.)
FAIR VALUE OF NET ASSETS:
 IFRS 3 revised requires that the subsidiary’s assets and
liabilities are recorded at their fair value for the purposes of
the calculation of goodwill and production of consolidated
accounts.
 Adjustments will therefore be required where the subsidiary’s
accounts themselves do not reflect fair value.
 Adjust both columns of W2 to bring the net assets to fair
value at acquisition and reporting date.
CURRENT ACCOUNTS AND
CASH/GOOD IN TRANSIT
Receivable in P and payable in S:
 Amounts owing within the group
 Should be eliminated upon consolidation

Cash/goods in transit
 At year-end current accounts may not agree because of in-
transit items (goods or cash)
 Make adjusting entry to the statement of financial position of
the recipient
 Cash: Dr Cash in transit; Cr Receivables current account
 Goods: Dr Inventory; Cr Payables current account
 Reconciled current account balances are removed from both
receivables and payables in the consolidated SOFP
UNREALISED PROFIT
 Profits made by members of the group on transactions with
other companies within the group
 Recognised in the accounts of the individual companies
 Group = eliminate unrealised profits

Example:
 Inventory sold between companies within the same group

 Cancel out current accounts

 Where goods are still held by the company that bought the

goods = unrealised profit has to be eliminated upon

consolidation
 Until goods are sold to a 3rd party, no unrealised profit should

exist in the group accounts

UNREALISED PROFIT (cont.)
1. Determine the value of closing inventory
included in individual company’s accounts
purchased by other company in group.

2. Use mark-up or margin to calculate how

much of the value represents profit earned
by the selling company

3. Make adjustments
UNREALISED PROFIT (cont.)
Adjustments:
 Seller = parent:
Dr. Group retained earnings
Cr. Group Inventory
 Seller = subsidiary:
Dr. Subsidiary retained earnings (at reporting date)
Cr. Group Inventory
Transfer of non-current assets
If one group member sells non-current assets
to another group member an adjustment must
be made to recreate the situation that would
have existed if the sale had not occurred:
 No profit on sale for the group
 Depreciation would have to be based on the original cost of
the asset to the group
 Profit on sale made by selling entity is unrealised and should
be eliminated as with inventory
 PPE most likely will not be sold to an outside party quickly,
therefore unrealised profit will be adjusted annually
Transfer of non-current assets
Adjustment:
Carrying value at reporting date with transfer xx
Carrying value at reporting date without transfer (xx)
Adjustment required xx

Adjustment calculated should be:

 Deducted when adding P + S non-current assets
 Deducted in retained earnings of seller

Dr. Retained earnings (of group or subsidiary)

Cr. Consolidated PPE
Transfer of non-current assets
Parent company (P) transfers an item of plant to its subsidiary
(S) for $6,000 at the start of 2010. The plant originally cost P
$10,000 and had an original useful economic life of 5 years
when purchased 3 years ago. The useful economic life of the
asset has not changed as a result of the transfer.

What is the unrealised profit on the transaction at the end of

the year of transfer (2013?)