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Financial Statements 2
Consolidations 1 – Introduction and consolidated statement of financial
position
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What is a group?
• Parent company • Subsidiary companies
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Parent
Subsidiary Subsidiary
What is a subsidiary?
• A company controlled by another company• Control may be because:– The parent owns the majority of the voting rights
(usually by owning more than half the ordinary shares)
– The parent can appoint a majority of the directors– The parent can exercise dominant interest
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What are consolidated accounts?
• Present the results of the group as if it were one single entity (substance over form)
• All the transactions of a subsidiary are under the control of the parent
• All results are the responsibility of the parent• The shareholders of the parent company need to be
fully informed about all the actions of the directors, including their management of subsidiaries
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The acquisition method
• Add together similar items in the parent and subsidiary accounts
• Cancel inter-company transactions and balances
• Allow for any non-controlling interest• Account for goodwill
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Top part of the statement of financial position
• This is the operational assets and liabilities of the group. These are always under the full control of the group so 100% of parent and subsidiary are added
• Any inter-company balances are cancelled out• Goodwill on acquisition is included as an
intangible non-current asset
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Bottom part of the SFP
• This represents ownership• Share capital is always just the parent
company• Each reserve is:– 100% of parent company– Share of subsidiary’s post-acquisition reserve
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Example 1 – a simple consolidation
• H has bought 100% of S• The investment of H and the share capital of S need
to be cancelled out.• All other assets and liabilities are added together• Share capital is only H• S has been owned since incorporation so all retained
earnings are post-acquisition and are included• Retained earnings are therefore
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Example 1 – consolidated statement of financial position of H Ltd
£000 £000Non Current Assets Equity Freehold land Ordinary shares Plant Retained Profits
450Current AssetsInventory Receivables Cash
Current LiabilitiesTrade creditorsCorporation tax
Non current liabilities10% debentures
450
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Example 2 – cancellation of internal items
• H has bought 100% of S share capital and some debentures
• Investment 1 of H and the share capital of S need to be cancelled out.
• Investment 2 and the debentures of S need to be cancelled. NB H owns 60,000, not all of them.
• Dividend receivable by H needs to be cancelled with the dividend payable of S
• Inter-company balances must always be cancelled
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Example 2 – consolidated statement of financial position of H Ltd
£000 £000Non current assets EquityPPE 380 Ordinary shares
Retained ProfitCurrent Assets 580Other 390
Current liabilitiesDividends payable Other creditors (140)
Non current liabilities£1 8% debentures
580
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Example 3 – non-controlling interest
• Less than 100% of S is owned by H – S owns 80,000 out of 100,000 shares so owns 80%. The non-controlling shareholders own 20%
• H still controls 100% of the assets and liabilities of S
• Top part of SFP reflects control – add 100% of S to H
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Example 3 – non-controlling interest
• Bottom part of SFP reflects ownership• SC is H only• Retained earnings is H plus share of post-
acquisition earnings of S:
• Non-controlling interest shows the amount owned by the non-controlling shareholders: shareholders’ funds of S times the non-controlling share:
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Example 3 – consolidated statement of financial position of H Ltd
£000Non current AssetsPPE 180
Current assets 160
Current liabilities (70)270
EquityOrdinary shares Retained Profit Non-controlling interest
270
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Example 4
• As example 3 plus• Cancel inter-company balance:
Dividend payable by S x H share
The remaining dividend is due to the NCI so remains as a liability
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Example 4 – consolidated statement of financial position of H Ltd
£000Non current AssetsPPE 180
Current AssetsOther current assets 152
Current liabilitiesSundry (60)Dividends payable
270
EquityOrdinary shares of £1Retained Profit Non-controlling interest
270
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Example 5 – Preference share capital with non-controlling interest
• Calculate percentage interest in ordinary shares and preference shares
• Voting rights attach only to ordinary shares• Retained earnings all belong to the ordinary
shareholders• Preference shareholders are only interested in the
preference share capital• NCI is in both the preference and ordinary shares
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Example 5 – Workings • W1 percentage shareholdings:
– Ordinary shares 30,000/40,000 =– NCI in ordinary shares =– Preference shares 18,000/20,000 =– NCI in preference shares =
• W2 Non-controlling interest – Prefs– Ords
• W3 Retained earnings– H– S
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Example 5 – consolidated statement of financial position of H Ltd
£000Non-current AssetsPPE 110
Current Assets 130
Current Liabilities (60)180
EquityOrdinary shares of £1 Retained Profit Non-controlling interest
180
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Example 6
• Calculate percentage interests in prefs and ord shares
• Cancel inter-company dividends• Calculate non-controlling interests• Calculate retained earnings
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Example 6 – workings
• W1 percentage shareholdings:– Ordinary shares 70,000/100,000 = – NCI in ordinary shares = – Preference shares 36,000/60,000 = – NCI in preference shares = – W2 Non-controlling interest – Prefs– Ords
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Example 6 – workings
• W3 Inter-company dividend– Pref– Ord
• Retained earnings– H– S
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Example 6 – consolidated statement of financial position of H Ltd
£000Non current AssetsPPE 370
Current AssetsOther 200
Current LiabilitiesDividend payable-ordinary-preference Other (110)
410EquityOrdinary shares 250Retained Profit Non-controlling interest
410
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Summary
• Calculate percentage shareholdings• Calculate NCI as % x net assets of S• Calculate retained earnings as H plus % share
of post-acquisition earnings of S• Add together parent and subsidiary• Cancel inter-company balances such as
debentures, dividends• Consolidated SC is always only H
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