ADVANCED FINANCIAL

ACCOUNTING L7 CONSOLIDATION 3

Consolidated Statements of
Comprehensive Income and
Changes in Equity
(Chapter 24 Sections 24.1 to 24.7)

1
 After this session you should be able to:
Prepare a Statement of Comprehensive Income
(SoCI) (= Statement of Profit or Loss + Other
Comprehensive Income) and a Statement of
Changes in Equity (SoCiE) for a group.
You should be able to deal with:
• intercompany transactions
• part-way acquisition
• dividends paid and received
• dividends/interest paid from pre-acquisition
profits
2
 Reasons for preparing
consolidated accounts
• Prevent manipulation
eg by inflating revenue by selling within the
group
• More meaningful EPS figure
• Better measurement of management
performance using ROCE

3
 Basic technique
• Add P’s and S’s Income Statements together
– Remember that profit for the year is credited
to retained earnings in the SoFP
– RE only includes post acquisition profits
– Therefore only add in S’s profit for the time it
has been controlled by P
• Calculate impairment loss
• Eliminate any intercompany transactions (sales of
inventory or PPE / NCA depreciation / dividends)
• Allocate part of the final consolidated profit to
the NCI 4
 Depreciation related to revaluation of
assets
If assets are revalued at acquisition, that means
the depreciation in the standalone entity was
calculated on the wrong basis and should be
adjusted.

If, for example, there is a fair value adjustment

for property of £ 10 000 000 at acquisition and
the company depreciates property over 10
years, then:
5
Depreciation related to revaluation of assets

• Dr Depreciation expense 10mm/10=1m

• Cr Property 1m

If acquisition occurred during the year, you’ll have to

APPORTION (x months / 12) and use a lower
depreciation charge for a period shorter than a year.

Remember that the NCI shared the FV adjustment (in

the CoC a/c) so they should get some of the
depreciation expense in proportion to their
shareholding. 6
 When does the NCI share the adjustment?
Group RE only Split between Group
RE and NCI
Depreciation on FV
adjustment

Impairment loss

Unrealised profit in
inventory

Profit on i/co sale of

non-current asset

7
 Lecture Example 1
Notes 1 to 3:
• Calculate goodwill on acquisition by writing up the
Cost of control a/c (in order to calculate the
impairment loss)

Note 4:
• Calculate the impairment loss
• Debit the impairment loss against consolidated
profits as an adjustment to operating expenses
8
 Lecture Example 1
Note 3:
Calculate additional depreciation on FV
adjustment

9
 Lecture Example 1
Note 5:
• Calculate the URP
• Debit the URP against consolidated profits as
an adjustment to cost of sales

• Eliminate the intercompany sale (and matching

purchase in CoS)

10
 Lecture Example 1
Note 6:
• Calculate Pit’s dividend received from Swamp
• Eliminate the intercompany dividend from
investment income
• How much investment income is receivable by
the group from third parties?

11
 Lecture Example 1
• Calculate the consolidated profit for the year
• Split the profit between the NCI and the parent
(Pit). Remember:
– Goodwill is measured using Method 2 so the NCI
shares the impairment loss
– There is additional depreciation which the NCI
shares
– Remember that the parent bought the unsold
inventory from Swamp

12
 What if dividends are paid out of pre-
acquisition profits

• Dividends FROM PRE-ACQUISITION PROFITS

cannot be seen as part of the parent’s income.
• This is because the dividends are paid out of
pre-acquisition equity and therefore may be
viewed as a “discount” or “pay-back” on what
was paid on acquisition.

Adapted from Elliott and Elliott

13
 Example
• Boat plc’s investment in its subsidiary Ship Ltd
cost £90,000
• Ship paid Boat a £5,000 dividend out of pre-
acquisition profits (Boat debited Bank, credited
Dividend income receivable)
• This means the investment should be shown as
£85,000 (= 90 - 5).
• DR DIVIDEND INCOME RECEIVABLE 5,000
CR INVESTMENT IN SUBSIDIARY 5,000
14
 Statement of Changes in Equity
• This shows the movements in the accounts
within equity between two Balance sheet
(SoFP) dates.
• It includes
– Share capital
– Share premium
– Retained earnings
– Other reserves

15
 Statement of Changes in Equity – single company
Share Share Retained Other Total
capital premium earnings reserve * equity
Balance brought 15,000 1,000 50,500 30,000 96,500
forward 1 January
New shares issued 10,000 2,000 12,000

Total comprehensive 22,700 22,700

income for the year
Dividends (2,500) (2,500)

Balance carried 25,000 3,000 70,700 30,000 128,700

forward 31 December
* May include the IAS 16 revaluation reserve.

16
Consolidated Statement of Changes in Equity
Share Retained Other Eg Total
capital earnings revaluation of NCI equity
NCAs NOT FV
adjs in CoC
Parent
Balance brought X X X X X
forward 1 January

New shares issued X X

Arising on acquisition X X

Total comprehensive X X X
income for the year

Dividends (X) (X) (X)

Balance carried X X X X X
forward 31 December
17
 Consolidated Statement of Changes in
Equity – split Parent vs NCI
Parent NCI Total equity

Balance brought forward 1 X X X

January

New shares issued X X

Revaluation of NCAs X X
Arising on acquisition X X
Total comprehensive income X X X
for the year

Dividends (X) (X) (X)

Balance carried forward 31 X X X

December
18
 Lecture Example 2 SoCiE
USE PROFORMA ON NEXT PAGE

19
 Ex 2 - Consolidated SoCiE
Let’s return to the Example of Pit plc.

• Assume that the parent company Pit plc had issued

share capital £20,000,000 and retained earnings
£45,000,000 at 1.1.X3.

• Pit paid a dividend of £1,000,000 on 31.12.X3.

• Prepare the Consolidated SoCiE for the year ended

31.12.X3, showing the total equity attributable to the
parent and to the NCI. 20
 Parent NCI Total
SC + equity
Reserves
Balance brought
forward 1 January 2013
New shares issued
Arising on acquisition
Total comprehensive
income for the year
Dividends
Balance carried
forward 31 December
21
Lecture Example 3 SCI (= SPL and OCI)

22
 Questions
Self study:
Elliott and Elliott Chapter 24 Questions:
2* Forest
3* Bill
4* Morn
6 Mars

Tutorial question: Belt plc

23