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Chapter 9The consolidated statement of financial position
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Contents
1. IAS summary of consolidation procedures
2. Non-controlling interest
3. Dividends paid by a subsidiary
5. A technique of consolidation
7. Intra-group sales of non-current assets
4. Goodwill arising on consolidation
6. Intra-group trading
Contents
8. Summary : consolidated statement of financial position
11. Fair values in acquisition accounting
10. Dividends and pre-acquisition profits
9. Acquisition of a subsidiary during its accounting period
IAS summary of consolidation procedures
Accounting standards: IAS 27Basic procedure (a) The carrying amount of the parent’s
investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated or cancelled
(b) Non-controlling interests in the net income of consolidated subsidiaries are adjusted against group income
(c) Non-controlling interests in the net assets of consolidated subsidiaries should be presented separately in the consolidated statement of financial position
IAS summary of consolidation procedures
Cancellation and part cancellation The preparation consists of two procedures: Take the individual accounts of the parent company and
each subsidiary and cancel out items which appear as a asset in one company and a liability in another
Add together all the un-cancelled assets and liabilities throughout the group
Items requires cancellation: The asset shares in subsidiary companies which appears
in the parent company’s accounts will be matched with the liability’s share capital in the subsidiary’s accounts
There may be intra-group trading.
IAS summary of consolidation procedures
Part cancellation An item may appear in the statements of
financial position of a parent company and its subsidiary, but not at the same amounts
The remaining un-cancelled will appear in the consolidated statements of financial position
Goodwill arising from consolidation
Non-controlling interest
Non-controlling interest can be valued at:(a) Share of net assets; or(b) Fair value (per IFRS 3 revised) Fair value can be based on MV of shares, or
you may be given the FV. Valuation of the NCI will affect the goodwill
calculation
Non-controlling interest
Procedure (a) Aggregate the assets and liabilities in the
statement of financial position is 100%p+100%s irrespectively of how much actually own
This shows that the amount of net assets controlled by the group.
(b) Share capital in that of the parent only
(c) Calculate the non-controlling interest share of the subsidiary’s net assets
(d) Balance of subsidiary’s reserves are consolidated
Goodwill arising from consolidation
Goodwill represents the difference between the amount paid to acquire the net assets of a subsidiary and the fair value of those net assets. It may be positive or negative.
Goodwill arising on consolidation is the difference between the consideration transferred plus the non-controlling interest and the fair value of the identifiable assets and liabilities acquired.
Goodwill arising from consolidation
GoodwillConsideration transferred XNon-controlling interest X
Less: Net fair value of identifiable assets, liabilities and contingent liabilities
(X)X
Goodwill arising from consolidation
Group NCI
$ $ $ Consideration transferred/Fair value of non-controlling interests X
X Less: Net fair value of identifiable assets
acquired and liabilities assumedX Group/NCI % (X) (X)
X X
X
Goodwill arising from consolidation
Example: Goodwill and pre-acquisition profits Sing Co acquired the ordinary shares of Wing Co on 31 March when the draft
statement of financial position of each company were as follows.
SING COSTATEMENT OF FINANCIAL POSITION AS AT 31 MARCH
$Assets Non-current assets Investment in 50,000 shares of Wing Co at cost 80,000 Current assets 40,000Total assets 12,000Equity and liabilitiesEquity Ordinary shares 75,000 Retained earnings 45,000Total equity and liabilities 120,000
Goodwill arising from consolidation
Example: Goodwill and pre-acquisition profits
WING CO
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH
Current assets
Equity
50,000 ordinary shares of $ 1 each
Retained earnings
$60,000
50,000
10,000
60,000
Goodwill arising from consolidation
Solution The technique to adopt here is to produce a new working : ‘ Goodwill’ . A formula is working out below.
Good willConsideration transferred
Non-controlling interest at acquisition
Net assets acquired as represented by :
Ordinary share capital
Share premium
Retained earnings on acquisition
$
X
XX
$
X
X
X
(X)
X
Goodwill arising from consolidation
Goodwill
Applying this to our example will look like this
Consideration transferredNon-controlling interest at acquisitionNet assets acquired as represented by :Ordinary share capitalRetained earnings on acquisition
$
50,000
10,000
$80,000-80,000
(60,000) 20,000
Solution:
Goodwill arising from consolidation
Goodwill
SING COCONSOLIDATED FINANCIAL STATEMENT OF FINANCIAL POSITION
AssetsNon-current assets Goodwill arising on consolidationCurrent assetsEquityOrdinary sharesRetained earnings
$
20,000100,000120,000
75,00045,000
Solution:
Goodwill arising from consolidation
Goodwill is likely to be higher when NCI is valued at FV. This excess is termed:Goodwill attributable to the NCI.Non- controlling interest at year end then becomes:
NCI% of S net assets XPURP (if applicable) (X)Goodwill attributable to NCI X
X
Goodwill – NCI at fair value
Goodwill arising from consolidationExample:P acquired 75% of the shares in S on 1 January 2007 when S had trained earnings of $ 15,000. The market share price of S’s shares just before the date of acquisition was $ 1.60. P values non-controlling interest at fair value. Good will is not impaired.The statements of financial position of P and S are as follows:
Property, plant and equipment
Shares in S
Current assets
Share capital - $ 1shares
Retained earnings
Current liabilities
P( $ )
60,000
68,000
128,000
52,000
180,000
100,000
70,000
170,000
10,000
180,000
S( $ )
50,000
-
50,000
35,000
85,000
50,000
25,000
75,000
10,000
85,000
Goodwill arising from consolidationSolution CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Assets
Property, plant and equipment
Goodwill(w1)
Current assets(52,000+35,000)
Total assets
Equity and liabilities
Equity attributable to the owners of p
Share capital
Retained earnings(W2)
Non-current assets
Total equity
Current liabilities(10,000+10,000)
$
110,000
23,000
87,000
220,000
100,000
77,500
177,500
22,500
200,000
20,000
220,000
Goodwill arising from consolidation
Solution: Workings
1.Goodwill
Consideration transferred
Non-controlling interest at acquisition (12,500 shares @ $ 1.60)
Net assets of S at acquisition(50,000+15,000)
Goodwill (parent and non-controlling interest)
Non-controlling interest at fair value (as above)
Non-controlling share of net assets at acquisition
Goodwill attributable to non-controlling interest
$
68,000
20,000
(65,000)
23,000
20,000
(16,250)
3,750
Goodwill arising from consolidation
Solution:2.Retained earnings
Per statement of financial position
Less pre-acquisition
Group share of S (10,000×25%)
Group retained earnings
P( $ )
70,000
7,500
77,500
S( $ )
25,000
(15,000)
10,000
3.Non-controlling interest at year end
Share of net assets of S(75,000×25%)
Goodwill(W1)
$
18,750
3,750
22,500
Goodwill arising from consolidation
Impairment of goodwill Impairment tests are conducted at least at
each year end. Any resulting impairment loss is first recognised against consolidated goodwill.
Calculate retainedearnings
Aggregate the assets and
liabilitiesCancel
common items
Calculate non-controlling
interest
Calculate goodwill
A technique of consolidation
A technique of consolidation
Example :The draft statement of financial position of Ping Co and Pong Co June 20×4 were as follows
PING CO
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20×4Assets
Non-current assets
Property, plant and equipment
20,000 ordinary shares in Pong Co at cost
Current assets
Inventory
Receivables
Cash
Total assets
$
50,000
30,000
3,000
16,000
2,000
$
80,000
21,000
101,000
A technique of consolidation
Equity
Ordinary shares of $ 1 each
Revaluation surplus
Retained earnings
Current liabilities
Owed to Pong Co
Trade payables
Total equity and liabilities
Example :
$
45,000
12,000
26,000
8,000
10,000
$
83,000
18,000
101,000
A technique of consolidationExample :
PING CO STATEMENT OF FINANCIAL POSITION AS AT JUNE 2004Assets
Property, plant and equipment
Current assets
Inventory
Owed by Ping Co
Receivables
Total assets
Equity
Ordinary shares of $ 1 eachRevaluation surplusRetained earnings
Current liabilitiesOwed to Pong CoTrade payables
Total equity and liabilities
$
8,000
10,000
7,000
25,000
5,000
28,000
$
40,000
25,000
65,000
58,000
70,000
65,000
A technique of consolidation
Solution:
1. Agree current accounts
Ping Co has goods in transit of $ 2,000making its total inventory $ 3,000+ $ 2,000= $ 5,000and its liability to Pong Co $ 8,000+ $ 2,000= $ 10,000
Cancel common items: these are the current accounts between the two companies of $ 10,000
2. Calculate goodwill
GoodwillConsideration transferred
Non-controlling interest(w3)
Net assets acquired as represented by:
Ordinary shares capital
Revaluation surplus on acquisition
Retained earnings on acquisition
Goodwill
$
25,000
5,000
6,000
$
30,000
7,200
37,200
(36,000)
1,200
A technique of consolidation
Solution:
3.Calculate non-controlling interest
(a) At acquisition
Pong Co’s net assets(w2)
×20%
(b) At year end
Pong Co’s net assets(65,000-7,000)
×20%
$
36,000
7,200
$
58,000
11,600
$
12,000
--
12,000
4. Calculate consolidated reserves
Consolidated revaluation surplus
Ping Co
Share of Pong Co’s post acquisition revaluation surplus
A technique of consolidation
Solution:
Consolidated retained earnings
Retained earnings per question
Less pre-acquisition
Share of Pong: 80%×$22,000
Ping
$
26,000
17,600
43,600
Pong
$
28,000
(6,000)
22,000
5.Prepare the consolidated statement of financial position
PING CO
CONSOLIDATED STATEMENT OF FIANNCIAL POSITION AS AT 30 JUNE 20×4
Assets
Non-current assets
Property, plant and equipment ($50,000+$40,000)
$ $
90,000
A technique of consolidationSolution:Intangible asset: goodwill
Current assets
Inventories($5,000+$40,000)
Receivables($16,000+$7,000)
Cash
Total assets
EquityOrdinary shares of $ 1 eachRevaluation surplusRetained earnings
Non-controlling interest
Current liabilitiesTradepayables($10,000+$7,000)
Total equity and liabilities
$
13,00023,0002,000
45,00012,00043,600
$
1,200
38,000
129,200
100,600
11,600
112,200
17,000
129,200
Intra-group trading
Unrealized profit( a ) Although A company makes a profit when it sells goods
to B, the group doesn’t make a sale until an outside customer buys the goods from B
(b) Any purchases from A Co, which remain unsold by B Co will be included in B’s inventory.
Cost
External sales
Closing inventory at cost
Profit / Loss
X
Nil
X
nil
An adjustment
DEBIT Group retained earnings
CREDIT Group inventory (statement of financial position)
Intra-group trading
11 22 33
Three possibilities as regards the treatment of intra-group profits
Remove only the group’s shares of the profit loading
Remove the whole profit loading
,charging the non-controlling interest with their proportion
Remove the whole profit without charging the non-controlling interest (to reduce group retained earnings by the whole profit loading)
Non-controlling interest in unrealized intra-group profits
Intra-group trading
1
DEBIT
Group retained earnings
2
DEBIT
Non-controlling interest
3
CREDIT
Group inventory(statement of financial position)
Entries to learn
Intra-group sales of non-current assets
To alter retained earnings and accumulated depreciation so that consolidated depreciation is based on the cost to the group
Consolidation adjustments
To alter retained earnings and non-current assets cost so as to remove any element of unrealized profit or loss.
Intra-group sales of non-current assets
The double entry is as follows: (a) Sale by parent DEBT Group retained earnings
CREDIT Non-current assets
with the profit on disposal, less the additional depreciation
(b) Sale by subsidiary DEBIT Group retained earnings
DEBIT Non-controlling interest CREDIT Non-current assets with the profit on disposal, less the additional depreciation
Summary: consolidated statement of financial position
PurposeTo show the net assets with P controls and the
ownership of those assets
Net assetsAlways 100%P plus 100%S providing P holds a majority of
voting rights
Share capital P only
ReasonSimply reporting to the parent company’s shareholders in
another form
Retained earnings
100%P plus group share of post-acquisition retained earnings of S less consolidation adjustments
ReasonTo show the extent to which the group actually owns total
assets less liabilities
Non-controlling interest
NIC shares of S’s consolidated net assets, or valuation at fair value
ReasonTo show the entity in a subsidiary not attributable to the
parent
Acquisition of a subsidiary during its accounting
Necessary to
distinguish
Profits and before acquisition
Profits and after acquisition
Dividends and pre-acquisition profits
Dividends paid by the subsidiary to its parent company may only be credited to profit or loss in the parent’s financial statement to the extent that they are paid from post-acquisition profits.
Dividends received by the parent company from pre-acquisition profits should be credited to investment in subsidiary’s account and treated as reducing the cost of shares acquired.
The post-acquisition element is genuinely earned by the parent and the pre-acquisition element should be deducted from cost of the combination
Fair value in acquisition accounting
Goodwill. Any excess consideration transferred over the acquirer’s interest in the fair value of the identifiable assets and liabilities acquired as at the date of the exchange transaction
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.
Fair value in acquisition accounting
Fair value adjustment calculation Two methods: (a) The subsidiary company might incorporate
any necessary revaluation in its own books of account
(b) The revaluations may be made as a consolidation adjustment without being incorporated in the subsidiary company’s books.
Fair value in acquisition accounting
Consideration transferred the assets transferred by the acquirer, the liabilities incurred by the acquirer (to former
owners of the acquiree), and equity interests issued by the acquirerDeferred consideration Consideration that is to be paid in the future
should be discounted to present value to determine its fair value
Contingent considerationContingent consideration (i.e. a payment dependent on whether specified future events occur or conditions are met, e.g. a profit target) is measured at fair value taking into account the probability of expected payment and the time period to settlement
Fair value in acquisition accounting
Cost of business combination The general principal is the acquirer should measure the cost of
a business combination as the total of the fair value, at the date of exchange, of the assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree.
The fair value of any deferred consideration is determined by discounting the amounts payable to their present value at the date of exchange.
Approach to the consolidated SFP
Step 1 Group structureStep 2 ProformaStep 3 Assets & liabilitiesStep 4 AdjustmentsStep 5 GoodwillStep 6 Investment in associateStep 7 Non-controlling interestStep 8 Retained earnings
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