FA Chapter 11 Group Accounts Consolidated Balance Sheet

chapter 11
Group accounts: consolidated balance sheet

Contents
Introduction Examination context Topic List 1 2 3 4 5 6 7 8 Context Goodwill Consolidated balance sheet workings Mid-year acquisitions Intra-group balances Unrealised intra-group profit Fair value adjustments Other consolidation adjustments
Summary and Self-test Technical reference Answers to Self-test Answers to Interactive questions
The Institute of Chartered Accountants in England and Wales, March 2009
385
Financial accounting
Introduction
Learning objectives
Identify the financial effects of group accounting in the context of BFRS Framework Explain and demonstrate the concepts and principles surrounding the consolidation of financial statements including: The single entity concept Substance over form The distinction between control and ownership
Tick of
Calculate the amounts to be included in an entityconsolidated balance sheet in respect of s its new and continuing interests in subsidiaries in accordance with the international financial reporting framework Prepare and present a consolidated balance sheet (or extracts therefrom) including adjustments for intra-group transactions and balances, goodwill, minority interests and fair values
Specific syllabus references for this chapter are: 1d,g, 3d,e.
Practical significance
The consolidated balance sheet provides the owners of the group with important information over and above that which is available in the parentown balance sheet. The cost of the investment made in the s subsidiary is replaced with the net assets controlled by the parent company. This application of substance over form provides a more realistic representation of what their investment is really worth as the balance sheets of the parent and subsidiary are produced as if they were a single entity. The single entity concept has more detailed implications for the preparation of the balance sheet which we will look at in this chapter.
Stop and think

Why is information about the assets and liabilities of the subsidiary of more use to the shareholders than the cost of their investment?
Working context
The preparation of the consolidated balance sheet involves the combination of the individual balance sheets of the group members. As we said in Chapter 10, this process is often computerised. However, detailed work will be needed on the consolidation adjustments. This might include for example, establishing fair values at the date of acquisition so that goodwill can be correctly calculated and the identification and elimination of intra-group balances. In this chapter, we will look at consolidation adjustments from the perspective of the consolidated balance sheet. Chapter 12 considers the same consolidation adjustments from the perspective of the consolidated income statement.
Syllabus links
This chapter looks in detail at the preparation of the consolidated balance sheet and is fundamental to the Financial Accounting syllabus. It builds on the principles introduced in Chapter 10 and applies them to more complex situations. A detailed knowledge and understanding of this topic will also be assumed in Financial & Corporate Reporting at the Advanced Stage.
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GROUP ACCOUNTS: CONSOLIDATED BALANCE SHEET
11
Examination context
Exam requirements
Each Financial Accounting paper is likely to feature either a written test question on the consolidated balance sheet or the consolidated income statement (or, more rarely, the consolidated cash flow statement). In a consolidated balance sheet question the majority of marks are likely to be awarded for the preparation of the balance sheet or extracts therefrom including a number of consolidation adjustments. Typically, the group structure will include more than one subsidiary or a subsidiary and an associate (associates are covered in Chapter 13). However, you may also be required to explain the consolidation process in relation to the principles of substance over form and/or the single entity concept. Short-form questions on this area, including goodwill calculations, fair value adjustments and the elimination of intra-group transactions and balances are also likely to appear regularly in the exam. In the examination, candidates may be required to: Prepare a consolidated balance sheet (or extracts therefrom) including the results of the parent entity and one or more subsidiaries including adjustments for the following: Acquisition of a subsidiary, including mid-year acquisitions Goodwill Intra-group items Unrealised profits Fair values Other consolidation adjustments
Explain the process of consolidating the balance sheet in the context of the single entity concept, substance over form and the distinction between control and ownership.
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1 Context
Section overview
This chapter considers the preparation of the consolidated balance sheet in more detail.
1.1
Consolidated balance sheet

This chapter builds on the basic principles of group accounts (dealt with in Chapter 10) by applying them in more detail to the preparation of the consolidated balance sheet. In particular it covers the following issues: Goodwill Intra-group balances Unrealised intra-group profit Standardised workings Fair value adjustments
All of the above relate to the application of the single entity concept and reflect the distinction between control and ownership.
2 Goodwill
Section overview
Goodwill on acquisition is recognised in the consolidated balance sheet as an intangible non-current asset. An annual impairment review is performed. Any discount on acquisition is recognised in profit or loss in the period in which the acquisition is made.
2.1
Calculation
In the previous chapter we said that the investment in the parentbalance sheet is cancelled against the s net assets of the subsidiary at acquisition.
Worked example: Cancellation

Using the facts from Interactive question 1 in Chapter 10, we had the following information: Cost of 80% investment in Reed Ltd (in Austin Ltdbalance sheet) s Net assets of Reed Ltd at acquisition CU 12,000 15,000
If you compare the cost of the investment (CU12,000) with the net assets acquired (80% CU15,000 = CU12,000) you can see that this cancels exactly. Austin Ltd has paid an amount which is equal to its share of the assets and liabilities of Reed Ltd at acquisition.
In practice this is not likely to be the case. The parent company will often pay more for the subsidiary than the net assets would suggest, in recognition that the subsidiary has attributes that are not reflected in its balance sheet. The extra amount paid by the parent is goodwill. (We looked at some of the factors which create goodwill in Chapter 6.)
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Interactive question 1: Goodwill
[Difficulty level: Easy]
P Ltd pays CU10,000 to buy 75% of the share capital of S Ltd. The balance sheet of S Ltd shows the following. Assets Share capital Retained earnings Equity Liabilities Requirement Calculate the goodwill arising on P Ltd's acquisition of S Ltd. Fill in the proforma below. CU Consideration Less: Share of net assets acquired Goodwill Point to note For the purposes of calculating goodwill net assets at acquisition are normally calculated as equity plus retained earnings (and other reserves, if any) at the acquisition date. See Answer at the end of this chapter. CU 16,000 1,000 11,000 12,000 4,000 16,000
2.2
Accounting treatment
Goodwill arising on consolidation is recognised in the consolidated balance sheet as an intangible non-current asset. Goodwill is not amortised through the income statement in annual instalments. Instead an annual impairment review will be performed to ascertain whether part of its value has been lost as a result of factors external or internal to the business. (Impairment losses under BAS 36 Impairment of Assets were covered in Chapter 5.) If goodwill has suffered an impairment the loss will be recognised in the consolidated income statement. Retained earnings in the consolidated balance sheet will also be reduced. Point to note Retained earnings will be reduced by the impairment recognised to date, not just the fall in value which relates to the current year. This is because goodwill is a consolidation adjustment, i.e. it only affects the group accounts. The single entity accounts which are used as the basis of the consolidated balance sheet will not reflect any previous impairments in goodwill.
2.3
Acquisition at a discount
In certain circumstances the parent entity may pay less to acquire a subsidiary than represented by its share of the subsidiarynet assets. s These circumstances might include the following: The subsidiary has a poor reputation It suffers from inherent weaknesses not reflected in its assets and liabilities The parent company has negotiated a good deal
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Financial accounting This negative balance or discount on acquisition recognised in profit or loss in the period in which is the acquisition is made.
3 Consolidated balance sheet workings

Section overview
A number of standard workings should be used when answering consolidation questions.
3.1
Question technique
As questions increase in complexity a formal pattern of workings is needed. Review the standard workings below, then attempt Interactive question 2 which puts these into practice. (1) Establish group structure P Ltd 80%
S Ltd (2) Set out net assets of S Ltd At BS date CU X X X At acquisition CU X X X Post acquisition CU X X
Share capital Retained earnings (3) Calculate goodwill Cost Less: Share of net assets at acquisition (see W2) Impairment to date Balance c/f (4) Calculate minority interest (MI) Share of net assets at BS date (W2) (5) Calculate retained earnings
CU X (X) X (X) X
CU X
P Ltd (100%) S Ltd (share of post-acquisition retained earnings (see W2)) Goodwill impairment to date (see W3)
CU X X (X) X
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Interactive question 2: Consolidated balance sheet workings [Difficulty level: Easy]

The following are the summarised balance sheets of a group of companies as at 31 December 20X1. Non-current assets Property, plant and equipment Investments Shares in Viv Ltd (75%) Shares in Neil Ltd (2/3) Current assets Capital and reserves Called up share capital (CU1 ordinary) Retained earnings Equity Liabilities Rik Ltd CU 100,000 25,000 10,000 45,000 180,000 50,000 100,000 150,000 30,000 180,000 Viv Ltd CU 40,000 Neil Ltd CU 10,000
40,000 80,000 20,000 40,000 60,000 20,000 80,000
25,000 35,000 10,000 15,000 25,000 10,000 35,000
Rik Ltd acquired its shares in Viv Ltd and Neil Ltd during the year, when their retained earnings were CU4,000 and CU1,000 respectively. At the end of 20X1 the goodwill impairment review revealed a loss of CU3,000 in relation to the acquisition of Viv Ltd. Requirement Prepare the consolidated balance sheet of Rik Ltd at 31 December 20X1. Fill in the proforma below. Rik Ltd: Consolidated balance sheet as at 31 December 20X1 CU Non-current assets Property, plant and equipment Intangibles (W3) Current assets Capital and reserves Called up share capital Retained earnings (W5) Attributable to equity holders of Rik Ltd Minority interest (W4) Equity Liabilities WORKINGS (1) Group structure Rik Ltd
75%
2/3
Viv Ltd
Neil Ltd
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Financial accounting (2) Net assets Balance sheet date CU Viv Ltd Share capital Retained earnings Balance sheet date CU Neil Ltd Share capital Retained earnings (3) Goodwill Viv Ltd CU Cost of investment Less: Share of net assets acquired Viv Ltd Neil Ltd Goodwill Impairment to date Balance c/f (4) Minority interest CU Viv Ltd Share of net assets at BS date Neil Ltd Share of net assets at BS date (5) Retained earnings CU Rik Ltd Viv Ltd Share of post-acquisition retained earnings Neil Ltd Share of post-acquisition retained earnings Goodwill impairment to date (W3) See Answer at the end of this chapter. Neil Ltd CU Total CU Acquisition CU Post-acquisition CU Acquisition CU Post-acquisition CU
4 Mid-year acquisitions
Section overview
If a subsidiary is acquired mid-year, net assets at acquisition will need to be calculated. Unless told otherwise assume profits of the subsidiary accrue evenly over time.
4.1
Calculation
A parent entity might not acquire a subsidiary at the start or end of a year. If the subsidiary is acquired midyear, it is necessary to calculate reserves, including retained earnings, at the date of acquisition.
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This is necessary in order to: Calculate net assets at acquisition (which is required as part of the goodwill calculation) Calculate consolidated reserves, e.g. retained earnings
Points to note 1 2 It is usually assumed that a subsidiaryprofits accrue evenly over time. s However, unless otherwise stated, it should be assumed that any dividends paid by the subsidiary are out of post acquisition profits. [Difficulty level: Easy]
Interactive question 3: Mid-year acquisition
P Ltd acquired 80% of S Ltd on 31 May 20X2 for CU20,000. S Ltd's retained earnings had stood at CU15,000 on 1 January 20X2. S Ltd's net assets at 31 December 20X2 were as follows. Share capital Retained earnings Equity Requirements (a) Produce the standard working for S Ltd's net assets (W2). CU 1,000 15,600 16,600
(b) Produce the standard working for goodwill on consolidation (W3). (c) Calculate S Ltd's retained earnings which will be included in the consolidated retained earnings.
(d) Calculate S Ltd's (i) pre-acquisition and (ii) post acquisition earnings assuming that S Ltd has paid a dividend of CU2,000 on 30 June 20X2. Fill in the proforma below.
Solution
(a) Net assets (W2) Balance sheet date CU Share capital Retained earnings (b) Goodwill (W3) CU Cost of investment Less: Share of net assets acquired (c) Profit from S Ltd included in consolidated retained earnings CU Share of post-acquisition retained earnings of S Ltd (d) (i) Pre-acquisition earnings CU Retained earnings per balance sheet Add back: Dividend paid Total earnings before dividend Pre-acquisition earnings Acquisition CU Post acquisition CU
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Financial accounting (ii) Post-acquisition earnings CU Total earnings before dividend = 7/12 = Less: Dividend paid See Answer at the end of the chapter.
5 Intra-group balances
Section overview
Group accounts reflect transactions with third parties only. The effect of transactions between group members are cancelled on consolidation. This is an application of the single entity concept.
5.1
The single entity concept

The objective of group accounts is to present the group as a single entity. Hence the effects of transactions between group members need to be eliminated, as the group has not transacted with any third party.
P Eliminate effect of transactions between group members Single entity concept S
Reflecting the group as a single entity means that items which are assets in one group company and liabilities in another need to be cancelled out, otherwise group assets and liabilities will be overstated. Intra-group balances result from, for example, One group company's loans, debentures or redeemable preference shares held by another group company Intra-group trading Dividends from a subsidiary to a parent
5.2
Loans, debentures and redeemable preference shares

Cancel the credit balance in one company against the debit balance in the other before adding assets and liabilities line-by-line.
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5.3
Intra-group trading
Outstanding amounts in respect of intra-group trading are usually recorded in the balance sheet in current accounts (= receivable or payable account for a fellow group company).
Step 1
Check that current accounts agree before cancelling. They may not agree if goods or cash are in-transit at year end.
Step 2
Make balances agree by adjusting for in-transit items in the receiving companybooks. s
Step 3
Cancel intra-group balances.
Worked example: Intra-group trading

Extracts from the balance sheets of Impala Ltd and its subsidiary Springbok Ltd at 31 March 20X4 are as follows. Impala Ltd CU 25,000 Springbok Ltd CU (20,000)
Receivable from Springbok Ltd Payable to Impala Ltd
Springbok Ltd sent a cheque for CU5,000 to Impala Ltd on 28 March 20X4, which Impala Ltd did not receive until 2 April 20X4.
Solution Steps 1 and 2

Assume that Impala Ltd had received the cash from Springbok Ltd. Impala Ltd CU 20,000 5,000 Springbok Ltd CU (20,000)
Receivable from Springbok Ltd (25-5) Cash and cash equivalents Payable to Impala Ltd
Step 3
Cancel inter-company balances on consolidation, leaving in the consolidated balance sheet Cash and cash equivalents CU 5,000
5.4
Dividends
As with intra-group balances such as loans, these must be cancelled out. The parentdividend receivable s from the subsidiary needs to be cancelled against the subsidiary's declared dividend payable, leaving in the consolidated balance sheet that part of the subsidiarydividend payable to the minority. This will be in s addition to the parent's own dividend payable.
Step 1
Check that all companies have recorded all declared dividends (you may be given draft balance sheets before such closing adjustments). Read the question carefully to establish this.
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Step 2
If declared dividends payable have not been recorded DR CR Retained earnings (via retained earnings working for P, net assets working for S) Payables declared dividends CU X CU X
with declared dividend payable
Step 3
If S has declared a dividend which has not yet been paid, P must record its share. If this has not been done, record Pdividend receivable from S. s DR CR Receivables dividends receivable P's retained earnings (via retained earnings working) CU X CU X
with share of dividend receivable from S
Step 4
Cancel the dividends receivable and dividends payable intra-group balances. This will leave that part of Sdividend payable to the minority in addition to Pown dividend payable. s s
Interactive question 4: Dividends
[Difficulty level: Intermediate]
Impala Ltd acquired 75% of Springbok Ltd when the retained earnings of Springbok Ltd stood at CU20,000. Balance sheets as at 31 March 20X4 are as follows. Impala Ltd CU 130,000 40,000 60,000 100,000 30,000 130,000 Springbok Ltd CU 90,000 25,000 45,000 70,000 20,000 90,000
Assets (including receivables) Share capital Retained earnings Equity Liabilities (including payables)
At 31 March 20X4 the two companies have declared dividends, which have not been accounted for, as follows. Impala Ltd Springbok Ltd Requirement Show the adjustments necessary to record the above information and how it will be presented in the consolidated balance sheet and consolidation workings at 31 March 20X4. Fill in the proforma below. (a) Recording of dividends in individual companies' books Impala Ltd's dividend Impala Ltd's books DR CR Springbok Ltd's dividend Springbok Ltd's books DR CR CU CU CU 10,000 5,000
CU
CU
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(b) In consolidation workings (1) Group structure Impala Ltd
75%
Springbok Ltd (2) Net assets of Springbok Ltd Balance sheet date CU Share capital Retained earnings Per question Dividends CU Acquisition CU Postacquisition CU
(4) Minority interest CU (5) Retained earnings CU Impala Ltd per question Dividends proposed Dividends from Springbok Ltd Share of Springbok Ltd post-acquisition (c) In consolidated balance sheet CU Payables: Declared dividends payable Parent company Minority interest Point to note There is no standard working 3 as goodwill is not required in this instance. See Answer at the end of this chapter.
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6 Unrealised intra-group profit

Section overview
The consolidated balance sheet must show assets at their cost to the group. Any profit arising on intra-group transactions must be eliminated from the group accounts until it is realised by a sale outside the group.
6.1
Introduction
One of the implications of the application of the single entity concept is that group accounts should only reflect profits generated from transactions which have been undertaken with third parties, i.e. entities outside the group. Where intra-group activities give rise to profits these are unrealised as far as the group as a whole is concerned. These profits can result from: Intra-group trading Intra-group transfers of non-current assets
Unrealised profits must be eliminated from the balance sheet on consolidation to prevent the overstatement of group profits.
6.2
Inventories
As we have seen in section 5.3 any receivable/payable balances outstanding between group companies, resulting from trading transactions, are cancelled on consolidation. If these transactions have been undertaken at cost no further problem arises. However, each company in a group is a separate trading entity and may sell goods to another group member at a profit. If these goods remain in inventories at the year end this profit is unrealised from the grouppoint of view. s In the consolidated balance sheet, applying the single entity concept, inventories must be valued at the lower of cost and net realisable value to the group. Where goods transferred at a profit are still held at the year end the unrealised profit must be eliminated on consolidation. This is achieved by creating a provision for unrealised profit (PURP). The way in which this adjustment is made depends on whether the company making the sale is the parent or the subsidiary.
6.2.1
Parent sells goods to subsidiary

The issues are best illustrated by an example.
Worked example: Intra-group profit (P S)

Ant Ltd, a parent company, sells goods which cost CU1,600 to Bee Ltd for CU2,000. Ant Ltd owns 75% of the shares in Bee Ltd. Bee Ltd still hold the goods in inventories at the year end. In the single entity accounts of Ant Ltd the profit of CU400 will be recognised. In the single entity accounts of Bee Ltd the inventory will be valued at CU2,000. If we simply add together the figures for retained reserves and inventory as recorded in the individual balance sheets of Ant Ltd and Bee Ltd the resulting figures for consolidated reserves and consolidated inventory will each be overstated by CU400. A consolidation adjustment is therefore necessary as follows:
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DR Seller's (Ant Ltd's) retained earnings (i.e. adjust in retained earnings working) CR Inventories in consolidated balance sheet Point to note
CU 400
CU
400
In this example, as the parent was the seller the unrealised profit is all 'owned' by the shareholders of Ant Ltd. None is attributable to the minority interest.
6.2.2
Subsidiary sells goods to parent

Where the subsidiary is the selling company the profit on the transfer will have been recorded in the subsidiarybooks. s
Worked example: Intra-group profit (S P)

Using the worked example above, if we now assume that Bee Ltd sold the goods to Ant Ltd the adjustment would be as follows: DR Seller's (Bee Ltd's) retained earnings (i.e. adjust in net assets working) CR Inventories in consolidated balance sheet Points to note 1 The net assets of the subsidiary at the balance sheet date will be reduced by the amount of the unrealised profit. Any subsequent calculations based on this net assets figure will therefore be affected as follows: 2 The group share of the post-acquisition retained earnings of the subsidiary will be reduced, i.e. the group will bear its share of the adjustment. The minority interest will be based on these revised net assets i.e. the minority interest will bear its share of the adjustment. CU 400 CU
400
Inventories in the consolidated balance sheet are reduced by the full amount of the unrealised profit irrespective of whether the parent or the subsidiary is the selling company.
Interactive question 5: Unrealised profits
[Difficulty level: Intermediate]
P Ltd owns 80% of S Ltd, which it acquired when the retained earnings of S Ltd were CU20,000. No goodwill was acquired. Balance sheets at the end of the current accounting period are as follows. P Ltd CU 170,000 30,000 100,000 130,000 40,000 170,000 S Ltd CU 115,000 10,000 65,000 75,000 40,000 115,000
Assets Share capital Retained earnings Equity Liabilities
During the current accounting period S Ltd sold goods to P Ltd for CU18,000, which gave S Ltd a profit of CU6,000. At the balance sheet date half of these goods were included in P Ltd's inventories.
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Financial accounting Requirement Show how the adjustment to eliminate unrealised profits will appear in the consolidation workings for P Ltd. Fill in the pro forma below. CU DR CR WORKINGS (1) Group structure P Ltd CU
80%
S Ltd (2) S Ltd net assets Balance sheet date CU Share capital Retained earnings Per question Less: PURP CU Acquisition CU Postacquisition CU
(4) Minority interest CU Share of net assets (5) Retained earnings CU P Ltd Share of S Ltd See Answer at the end of this chapter.
6.3
Non-current asset transfers

As well as trading with each other, group companies may wish to transfer non-current assets (NCA). If the asset is transferred at a profit two issues arise: The selling company will have recorded a profit or loss on sale The purchasing company will have recorded the asset at the amount paid to acquire it, and will use that amount as the basis for calculating depreciation.
On consolidation, the single entity concept applies. The consolidated balance sheet must show assets at their cost to the group, and any depreciation charged must be based on that cost. In other words, the group accounts should reflect the non-current asset as if the transfer had not been made.
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The adjustment in the consolidated balance sheet is calculated as follows: NBV of NCA at year end Less: NBV of NCA at year end if transfer had not been made Unrealised profit The adjustment is then made as: DR Selling company retained earnings CR NCA NBV in consolidated balance sheet This treatment is consistent with that of inventories. CU X CU X CU X (X) X
6.3.1
Parent sells non-current asset to subsidiary

As with inventories the impact of the adjustment will depend on whether the parent company or the subsidiary makes the sale.
Interactive question 6: Non-current asset transfers
P Ltd owns 80% of S Ltd. P Ltd transferred to S Ltd a non-current asset at a value of CU15,000 on 1 January 20X7. The original cost to P Ltd was CU20,000 and the accumulated depreciation at the date of transfer was CU8,000. Both companies depreciated such assets at 20% per year on cost to the company. Requirement Calculate the consolidated balance sheet adjustment at 31 December 20X7. Fill in the proforma below.
Solution
Following the transfer the asset will be included at CU Cost Less: Depreciation
Had the transfer not been made, the asset would stand in the books at CU Cost Less: Accumulated depreciation at date of transfer Provision for current year
Overall adjustment in CBS CU DR CR Seller's (P Ltd's) retained earnings (i.e. adjust in retained earnings working) Non-current assets CU
Point to note In this question, as the parent is the selling company, none of the adjustment is attributed to the minority interest. See Answer at the end of this chapter.
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6.3.2
Subsidiary sells non-current asset to parent

Again a consolidation adjustment is made to reflect the situation that would have existed if the transfer had not been made. The amount of the adjustment is calculated as before (see section 6.3 above). The adjustment is then made as follows: DR Seller's (S Ltd) retained earnings (i.e. adjust in net assets working) CR NCA NBV in consolidated balance sheet Points to note 1 2 As the subsidiary is the seller the adjustment to retained earnings will be made in the net assets working. Any subsequent calculations based on this net assets figure will therefore be affected as follows: The group share of the post-acquisition retained earnings of the subsidiary will be reduced i.e.. as for sale of inventories The minority interest will be based on these revised net assets, i.e. as for sale of inventories. CU X CU
7 Fair value adjustments

Section overview
In calculating the goodwill acquired, the net assets of the subsidiary should be measured at their fair value. A consolidation adjustment will be required for the difference between the book value and fair value of the net assets.
7.1
Calculation of goodwill
In section 2 of this chapter we said that goodwill is calculated by comparing the cost of the investment in the subsidiary with the net assets acquired. Strictly speaking the net assets brought into this calculation should be at fair value, which may be different to book value. This raises two issues: How do we measure the fair value of the subsidiarynet assets? s How are fair values reflected in the consolidation?
How we measure the fair value of a subsidiarynet assets will be dealt with in detail in Chapter 15. This s section looks at the way that the fair values are incorporated into the consolidated balance sheet.
7.2
Reflecting fair values

The identifiable assets, liabilities and contingent liabilities of a subsidiary are brought into the consolidated financial statements at their fair value. Normally these fair values are not reflected in the single entity financial statements. Therefore the difference between fair values and book values is treated as a consolidation adjustment made only for the purposes of the consolidated financial statements. The increase (or decrease) in value is treated as a revaluation at acquisition and also applies in subsequent years if the asset is still held.
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Revaluation upwards Revaluation downwards Points to note 1 2
Create a revaluation reserve in the net assets working at acquisition and at the balance sheet date. Create a provision against retained earnings in the net assets working at acquisition and at the balance sheet date.
Post-acquisition depreciation may need to be adjusted so that it is based on the revalued amount. Goodwill in the subsidiaryindividual balance sheet is not part of the identifiable assets and s liabilities acquired. If the subsidiaryown balance sheet at acquisition includes goodwill, this must not s be consolidated. In the net asset working retained earnings at acquisition and at the balance sheet date should be reduced by the amount of the goodwill. [Difficulty level: Easy]
Interactive question 7: Fair value adjustments
P Ltd acquires 60% of S Ltd on 31 December 20X4 for CU80,000. The balance sheet of S Ltd at this date is as follows. Freehold land (fair value CU30,000) Goodwill arising on the acquisition of a sole trader Sundry assets (book value = fair value) Share capital Retained earnings Equity Liabilities Requirement Calculate the goodwill arising on the acquisition of S Ltd. Fill in the proforma below. (1) Group structure P Ltd CU 20,000 5,000 130,000 155,000 20,000 85,000 105,000 50,000 155,000
60%
S Ltd (2) Net assets of S Ltd BS date = Acquisition date CU CU Share capital Revaluation Retained earnings Per question Less: Goodwill
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Financial accounting (3) Goodwill CU Cost of investment Less: Share of FV of net assets acquired Point to note In the asset section of the balance sheet the freehold land will be consolidated at CU30,000. The goodwill in the subsidiary's balance sheet of CU5,000 will not be recognised as an intangible asset in the consolidated balance sheet. See Answer at the end of this chapter.
8 Other consolidation adjustments

Section overview
If a subsidiary has reserves other than retained earnings, the group share of post-acquisition reserves should be consolidated. The balances of the subsidiary should be adjusted to reflect the accounting policies of the parent company prior to consolidation.
8.1
Other reserves in a subsidiary

As we have already mentioned, a subsidiary may have other reserves apart from retained earnings in its balance sheet, e.g. a revaluation reserve. If this is the case, such reserves should be treated in exactly the same way as retained earnings. Other reserves at acquisition form part of the net assets at acquisition, i.e. they should be recorded in the net assets working at acquisition. The group share of any post acquisition movement in other reserves should be recognised in the consolidated balance sheet.
Points to note 1 2 A separate working should be used for each reserve; do not mix retained earnings with other reserves as the other reserves may include amounts which are not distributable by way of dividend. If a subsidiary is loss-making or has any other negative reserves the group will consolidate its share of the post-acquisition losses/negative reserves.
8.2
Accounting policy alignments

On consolidation uniform accounting policies must be applied for all amounts. This is another consequence of the single entity concept. If the parent company and subsidiary have different accounting policies the balances in the subsidiary s financial statements must be adjusted to reflect the accounting policies of the parent company. Point to note These adjustments are made in the net assets working.
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Interactive question 8: Accounting policy alignments
William Ltd has been 85% owned by Mary Ltd for some years. On 1 January 20X4 William Ltd acquired an item of plant for CU40,000. William Ltd depreciates this item of plant at 15% on a reducing balance basis, while Mary Ltd's policy for this class of plant is 10% per annum on a straight-line basis. Requirement Set out the adjustment required in the preparation of the consolidated balance sheet at 31 December 20X5. Fill in the pro forma below. Following the transfer the asset will be included at: CU Carrying amount of plant in CBS Carrying amount in William Ltd's BS Increase in carrying amount CU DR CR CR Non-current assets Consolidated retained earnings Minority interest CU
See Answer at the end of this chapter.
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Summary and Self-test
Summary
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Self-test
1 The summarised balance sheets of Peep Ltd and Pitti Ltd at 31 December 20X6 are as follows. Peep Ltd CU 300,000 100,000 200,000 300,000 Pitti Ltd CU 160,000 100,000 60,000 160,000
Net assets Share capital (CU1 shares) Retained earnings
On 31 December 20X6 Yum Ltd purchased for cash 90% of Peep Ltdshares for CU360,000 and 75% s of Pitti Ltdshares for CU100,000. The carrying amounts of the assets in both companies are s considered to be fair values. In the consolidated balance sheet at 31 December 20X6, goodwill and discount on acquisition will be shown as Goodwill A B C D 2 CUnil CU60,000 CU90,000 CU90,000 Discount on acquisition CUnil CU60,000 Nil CU20,000
The summarised balance sheets of Black Ltd and Red Ltd at 31 December 20X6 were as follows. Black Ltd Red Ltd CU'000 CU'000 Total assets 60,000 29,000 Share capital Retained earnings Equity Current liabilities Total equity and liabilities 20,000 24,000 44,000 16,000 60,000 10,000 4,000 14,000 15,000 29,000
On 1 January 20X7 Black Ltd bought all the share capital of Red Ltd for CU17,000,000 in cash. The carrying amount of Red Ltdassets are considered to be fair values. s The amount of retained earnings to be included in the consolidated balance sheet as at 1 January 20X7 are A B C D 3 CU21,000,000 CU24,000,000 CU25,000,000 CU28,000,000
Milton Ltd owns all the share capital of Keynes Ltd. The following information is extracted from the individual company balance sheets as on 31 December 20X1. Milton Ltd Keynes Ltd CU CU Current assets 500,000 200,000 Current liabilities 220,000 90,000 Included in Milton Ltdpurchase ledger is a balance in respect of Keynes Ltd of CU20,000. The s balance on Milton Ltdaccount in the sales ledger of Keynes Ltd is CU22,000. The difference between s those gures is accounted for by cash in transit. If there are no other intra-group balances, what is the amount of current assets less current liabilities in the consolidated balance sheet of Milton Ltd and its subsidiary? A B C D CU368,000 CU370,000 CU388,000 CU390,000
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Financial accounting 4 Laker Ltd owns 80% of the ordinary shares of Hammond Ltd. The following amounts have been extracted from their draft nancial statements at 31 December 20X0. Laker Ltd CU Current liabilities Trade payables Amount owed to subsidiary Income tax Amounts owed to trade investments Other payables 5,200 500 100 150 50 6,000 Hammond Ltd CU 7,100 150 200 70 7,520
Hammond Ltd shows an amount receivable from Laker Ltd of CU620 and the difference is due to cash in transit. What is the total carrying amount of current liabilities in the consolidated balance sheet of Laker Ltd? A B C D 5 CU11,900 CU12,400 CU13,020 CU13,170
Austen Ltd has owned 100% of Kipling Ltd and 60% of Dickens Ltd for many years. At 31 December 20X5 the trade receivables and trade payables shown in the individual company balance sheets were as follows. Austen Ltd CU'000 50 30 Kipling Ltd CU'000 30 15 Dickens Ltd CU'000 40 20
Trade receivables Trade payables Trade payables are made up as follows. Amounts owing to Austen Kipling Dickens Other suppliers
2 3 25 30
15 15
4 16 20
The intra-group accounts agreed after taking into account the following. (1) An invoice for CU3,000 posted by Kipling Ltd on 31 December 20X5 was not received by Austen Ltd until 2 January 20X6 (2) A cheque for CU2,000 posted by Austen Ltd on 30 December 20X5 was not received by Dickens Ltd until 4 January 20X6. What amount should be shown as trade receivables in the consolidated balance sheet of Austen Ltd? A B C D CU56,000 CU106,000 CU109,000 CU111,000
408
11
The following is the draft balance sheet information of Ho Ltd and Su Ltd, as on 30 September 20X2. Ho Ltd CU'000 2,600 750 350 3,700 3,700 Su Ltd CU'000 1,000 700 900 100 2,700 2,700
Ordinary CU1 shares Retained earnings Trade payables Other payables
Total assets
Ho Ltd acquired 60% of the share capital of Su Ltd several years ago when Su Ltdretained earnings s were CU300,000. Su Ltd has not yet accounted for the estimated audit fee for the year ended 30 September 20X2 of CU40,000. The consolidated retained earnings on 30 September 20X2 are A CU950,000 B CU966,000 C CU990,000 D CU1,450,000 7 Tottenham Ltd owns 95% of Chelsea Ltd and 97.5% of Leyton Ltd. Dividends for the year ended 31 December 20X8 are as follows. Interim paid CU 10,000 Final proposed CU 40,000 (declared 15 December 20X8) 10,000 (declared 15 December 20X8) 18,000 (declared 14 February 20X9)
Tottenham Ltd Chelsea Ltd Leyton Ltd
What is the total amount shown for dividends payable appearing in the consolidated balance sheet as at 31 December 20X8? A B C D 8 CU40,500 CU41,150 CU68,000 CU50,950
Bass Ltd acquired its 70% holding in Miller Ltd many years ago. At 31 December 20X7 Miller Ltd had inventory with a carrying amount of CU15,000 purchased from Bass Ltd at cost plus 25%. The effect on consolidated retained earnings and minority interests as stated in the consolidated balance sheet is A B C D No effect on minority interest No effect on minority interest Reduce minority interest by CU250 Reduce minority interest by CU750 Reduce group retained earnings by CU1,000 Reduce group retained earnings by CU3,000 Reduce group retained earnings by CU750 Reduce group retained earnings by CU2,250
Oxford Ltd owns 100% of the issued share capital of Cambridge Ltd, and sells goods to its subsidiary at a prot margin of 20%. At the year end their balance sheets showed inventories of Oxford Ltd Cambridge Ltd CU290,000 CU160,000
The inventory of Cambridge Ltd included CU40,000 of goods supplied by Oxford Ltd and there was inventory in transit from Oxford to Cambridge amounting to a further CU20,000. At what amount should inventory be carried in the consolidated balance sheet? A B C D CU438,000 CU442,000 CU458,000 CU462,000
409
Financial accounting 10 Rugby Ltd has a 75% subsidiary, Stafford Ltd, and is preparing its consolidated balance sheet as on 31 December 20X6. The carrying amount of property, plant and equipment in the two companies at that date is as follows. Rugby Ltd Stafford Ltd CU260,000 CU80,000
On 1 January 20X6 Stafford Ltd had transferred some equipment to Rugby Ltd for CU40,000. At the date of transfer the equipment, which had cost CU42,000, had a carrying amount of CU30,000 and a remaining useful life of ve years. The group accounting policy is to depreciate equipment on a straight-line basis down to a nil residual value. It is also group policy not to revalue equipment. What is the figure that will be disclosed as the carrying amount of property, plant and equipment in the consolidated balance sheet of Rugby Ltd as on 31 December 20X6? A B C D 11 CU340,000 CU332,000 CU330,000 CU312,000
Makepeace Ltd owns 70% of Dempsey Ltd. Draft balance sheets of the two companies at 31 December 20X7 show the following. Makepeace Ltd CU 101,000 (25,000) 76,000 Dempsey Ltd CU 75,000 (30,000) 45,000
Property, plant and equipment at cost Accumulated depreciation Carrying amount
On 1 January 20X7 Makepeace Ltd sold to Dempsey Ltd a machine which had originally cost CU24,000 and was 75% depreciated. The prot on sale was CU4,000. Both companies depreciate at 25% per annum on cost. What is the carrying amount of property, plant and equipment for inclusion in the consolidated balance sheet at 31 December 20X7? A B C D 12 CU117,000 CU123,500 CU111,000 CU113,500
Lynton Ltd acquired 75% of the 200,000 CU1 ordinary shares and 50% of the 100,000 CU1 redeemable preference shares of Pinner Ltd when its retained earnings were CU24,000. The retained earnings of Lynton Ltd and Pinner Ltd are now CU500,000 and CU60,000 respectively. What are the gures for minority interest and consolidated retained earnings in the consolidated balance sheet? A B C D Minority interest CU65,000 CU65,000 CU115,000 CU115,000 Consolidated retained earnings CU527,000 CU545,000 CU527,000 CU545,000
13
Wolf Ltd acquired 80,000 CU1 ordinary shares in Fox Ltd on 1 April 20X5 at a cost of CU77,000. Fox Ltdretained earnings at that date were CU50,000 and its issued ordinary share capital was s CU100,000. What is the amount of the discount on acquisition arising on the acquisition? A B C D CU35,000 CU43,000 CU63,000 CU73,000
410
11
14
Sansom Ltd has two subsidiaries, Mabbutt Ltd and Waddle Ltd. It purchased 10,000 CU1 shares in Mabbutt Ltd on 1 January 20X1 for CU35,000 when the retained earnings of Mabbutt Ltd stood at CU21,000. It purchased 15,000 CU1 shares in Waddle Ltd for CU20,000 on 31 December 20X1 when the retained earnings of Waddle Ltd stood at CU16,000. The issued share capital of the two subsidiaries is as follows. Mabbutt Ltd Waddle Ltd CU15,000 CU20,000
By the end of 20X4 goodwill impairment losses totalled CU4,400. What is the carrying amount of goodwill in the consolidated balance sheet at 31 December 20X4? A B C D 15 CU11,000 CU10,800 CU6,600 CUnil
Tring Ltd acquired 60% of the share capital of Hessle Ltd on 31 March 20X6. The share capital and retained earnings of Hessle Ltd as on 31 December 20X6 were as follows. Ordinary 25p shares Retained earnings at 1 January 20X6 Net profit for 20X6 The prots of Hessle Ltd have accrued evenly throughout 20X6. The discount arising on acquisition was CU3,000. What is the cost of the investment in Hessle Ltd in the balance sheet of Tring Ltd as on 31 December 20X6? A B C D CU318,000 CU324,000 CU336,000 CU342,000 CU 400,000 120,000 60,000 580,000
16
Hill Ltd owns 60% of the ordinary share capital of Down Ltd and all of its 10% borrowings. The following transactions have been recorded by Down Ltd as at 31 December 20X3. Half yearinterest due s Interim dividend paid CU15,000 CU50,000
Hill Ltd has not yet accounted for the interest receivable from Down Ltd. In preparing the consolidated balance sheet for Hill Ltd and its subsidiary at 31 December 20X3, which of the following adjustments is required in respect of intra-group dividends and debenture interest? A B C Debit Current liabilities CU45,000 Current liabilities CU45,000 Current liabilities CU15,000 Current liabilities CU30,000 Credit Current assets CU15,000 Retained earnings CU30,000 Current assets CU30,000 Retained earnings CU15,000 Retained earnings CU15,000
Current assets CU30,000
411
Financial accounting 17 Heron Ltd owns 80% of Sparrow Ltd and 75% of Swift Ltd. Sparrow Ltd has made a non-current loan of CU500,000 to Swift Ltd. In the nancial statements of Heron Ltd group, the loan will appear A B C D 18 As a non-current asset in the balance sheet of the parent company and nowhere in the consolidated balance sheet As a non-current asset in the balance sheet of the parent company and as a non-current asset in the consolidated balance sheet Nowhere in the balance sheet of the parent company but as a non-current asset in the consolidated balance sheet Nowhere in the balance sheet of the parent company and nowhere in the consolidated balance sheet
Nasty Ltd is a wholly-owned subsidiary of Ugly Ltd. Inventory in their individual balance sheets at the year end is shown as follows. Ugly Ltd Nasty Ltd CU40,000 CU20,000
Sales by Ugly Ltd to Nasty Ltd during the year were invoiced at CU15,000, which included a prot to Ugly Ltd of 25% on cost. Two thirds of these goods were in inventory at the year end. At what amount should inventory appear in the consolidated balance sheet? A B C D 19 CU50,000 CU57,000 CU57,500 CU58,000
On 31 December 20X3 Easby Ltd purchased 80% of the share capital of Haddon Ltd for CU226,000 when the retained earnings of the latter stood at CU60,000. The fair value of Haddon Ltdproperty was CU70,000 more than the carrying amount, but this s revaluation had not been incorporated in Haddon Ltdbooks. s The goodwill arising on consolidation was CU42,000. What is the carrying amount for minority interest in the consolidated balance sheet of Easby Ltd as at 31 December 20X3? A B C D CU36,800 CU46,000 CU63,500 CU67,000
20
Fallin Ltd acquired 100% of the share capital of Gaydon Ltd for CU150,000 on 1 May 20X6. Equity at 30 April was as follows. Fallin Ltd 20X7 CU'000 100 340 440 Gaydon Ltd 20X7 20X6 CU'000 CU'000 50 50 25 15 135 25 210 90
Ordinary share capital Revaluation reserve Retained earnings
An impairment review at 30 April 20X7 revealed that goodwill arising on the acquisition of Gaydon Ltd had become impaired by CU6,000 in the year. What were the consolidated capital and reserves of the Fallin Ltd group on 30 April 20X7? A B C D CU500,000 CU548,000 CU554,000 CU560,000
412
11
21
Wilsons Ltd purchased 70% of Watneys Ltd for CU20,000 on 30 June 20X2. The balance sheets of Watneys Ltd are as follows. 30 September 20X2 20X1 CU CU 1,000 1,000 2,000 2,000 21,000 12,000 24,000 15,000
Ordinary share capital Share premium Retained earnings You ascertain that there have been no issues of shares since the above purchase. What is the goodwill acquired in the business combination? A B C D CU4,775 CU3,200 CU9,500 CU4,600
Data for questions 22 to 26 With reference to the information below, answer questions 22 to 26 with respect to the consolidated nancial statements of VW Ltd. Summarised balance sheets as at 30 September 20X7 ASSETS Property, plant and equipment Investments 100,000 shares in Polo Ltd 40,000 shares in Golf Ltd Current assets Inventories Trade receivables Cash EQUITY AND LIABILITIES Capital reserves Ordinary shares of CU1 each Retained earnings Equity Current liabilities Notes (1) VW Ltd acquired its shares in Polo Ltd on 1 October 20X5 when Polo Ltdretained earnings were s CU30,000. (2) VW Ltd acquired its shares in Golf Ltd on 30 September 20X6. Golf Ltdnet prot for the year s ended 30 September 20X7 was CU30,000. (3) Included in Polo Ltdinventory at 30 September 20X7 was CU15,000 of goods purchased from VW s Ltd during the year. VW Ltd invoiced Polo Ltd at cost plus 50%. (4) During the year ended 30 September 20X7 Polo Ltd sold goods costing CU50,000 to Golf Ltd for CU70,000. Golf Ltd still had half of these goods in inventory at 30 September 20X7. (5) The following intra-group balances are reected in the above balance sheet of VW Ltd at 30 September 20X7. CU20,000 receivable from Polo Ltd CU10,000 payable to Golf Ltd VW Ltd CU'000 200 150 70 150 250 50 870 Polo Ltd CU'000 40 90 40 20 190 Golf Ltd CU'000 30 80 20 10 140
500 90 590 280 870
100 40 140 50 190
50 70 120 20 140
413
Financial accounting 22 Minority interest will be carried at A B C D 23 CU52,000 CU24,000 CU18,000 CU10,000
Inventories will be carried at A B C D CU320,000 CU305,000 CU302,500 CU295,000
24
Trade receivables will be carried at A B C D CU295,000 CU290,000 CU285,000 CU280,000
25
What is the amount of goodwill to be included under intangible assets? A B C D CU22,000 CU20,000 CU18,000 CUnil
26
The consolidated retained earnings will be presented at A B C D CU114,000 CU113,000 CU111,000 CU109,000
27
CRAWFORD LTD PART II Following on from the facts in Chapter 10 Self-test question 4 (Crawford Ltd part 1), assume that Crawford Ltd paid CU2,500 (not CU2,000) for the 2,000 shares in Dietrich Ltd and that Crawford Ltdproperty, plant and equipment were CU26,500 (not CU27,000), all other information remaining s the same. An impairment review at 30 June 20X0 revealed that goodwill in respect of Dietrich Ltd had fallen in value over the year by CU40. By 1 July 20W9 goodwill had already been written down by CU210. Requirement Prepare the consolidated balance sheet of Crawford Ltd as at 30 June 20X0. (7 marks)
28
DUBLIN LTD The following are the summarised balance sheets of a group of companies as at 31 December 20X9. Dublin Ltd CU ASSETS Non-current assets Property, plant and equipment Investments: 40,000 CU1 shares in Shannon 30,000 CU1 shares in Belfast Current assets Total assets Shannon Ltd CU Belfast Ltd CU
90,000 50,000 45,000 185,000 215,000 400,000
60,000 60,000 50,000 110,000
50,000 50,000 30,000 80,000
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EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Revaluation reserve Retained earnings Equity Current liabilities Total equity and liabilities
190,000 60,000 250,000 150,000 400,000
50,000 10,000 30,000 90,000 20,000 110,000
40,000 16,000 56,000 24,000 80,000
Dublin Ltd purchased its shares in Shannon Ltd ve years ago when there were retained earnings of CU20,000 and a balance on its revaluation reserve of CU10,000. Belfast Ltd had retained earnings of CU16,000 when Dublin Ltd acquired its shares on 1 January 20X9. At the end of 20X9 the goodwill impairment review revealed a loss of CU300 in relation to the goodwill acquired in the business combination with Belfast Ltd. Requirement Prepare the consolidated balance sheet as at 31 December 20X9 of Dublin Ltd and its subsidiaries. (12 marks) 29 EDINBURGH LTD The following are the draft balance sheets of Edinburgh Ltd and its subsidiary Glasgow Ltd as at 31 December 20X5. Edinburgh Ltd Glasgow Ltd CU CU CU CU ASSETS Non-current assets Property, plant and equipment 147,000 82,000 Investments 80,000 227,000 82,000 Current assets Inventories 73,200 35,200 Trade and other receivables 82,100 46,900 Glasgow Ltd current account 14,700 Cash and cash equivalents 8,000 25,150 178,000 107,250 Total assets 405,000 189,250 EQUITY AND LIABILITIES Capital and reserves Ordinary share capital (CU1 shares) Share premium account Revaluation reserve Retained earnings Equity Non-current liabilities Borrowings Current liabilities Trade and other payables Edinburgh Ltd current account Total equity and liabilities
250,000 32,000 282,000
50,000 6,250 15,000 40,000 111,250 20,000
123,000 123,000 405,000
50,000 8,000 58,000 189,250
415
Financial accounting Points to note 1 Edinburgh Ltd acquired 40,000 shares in Glasgow Ltd on 1 January 20X5 for a cost of CU63,000 when the balance on Glasgow Ltdreserves were as follows. s Share premium account Revaluation reserve Retained earnings CU 6,250 10,000
Edinburgh Ltd also acquired CU12,000 of Glasgow Ltdnon-current borrowings at par on the same s date. 2 3 The current account difference is due to cash in transit. At the end of 20X5 the goodwill impairment review revealed a loss of CU1,250 in relation to the goodwill acquired in the business combination with Glasgow Ltd. Requirement Prepare the consolidated balance sheet of Edinburgh Ltd at 31 December 20X5. 30 CLOSE LTD The summarised balance sheets of Close Ltd and Steele Ltd as at 31 December 20X9 were as follows. Close Ltd CU CU ASSETS Non-current assets Property, plant and equipment Investments Current assets Inventories Trade and other receivables Investments Cash and cash equivalents Current account Close Ltd Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital (CU1 shares) Share premium account Revaluation reserve Retained earnings Equity Current liabilities Trade and other payables Current account Steel Ltd Total equity and liabilities The following information is relevant. (1) On 1 January 20X7 Close Ltd acquired 48,000 shares in Steele Ltd for CU84,000 cash when the retained earnings of Steele Ltd were CU8,000 and the balance on the revaluation reserve was CU16,000. (2) The inventories of Close Ltd include CU4,000 of goods from Steele Ltd invoiced to Close Ltd at cost plus 25%. (3) A cheque for CU500 from Close Ltd to Steele Ltd, sent before 31 December 20X9, was not received by the latter company until January 20Y0. Steele Ltd CU CU (15 marks)
80,000 84,000 164,000 18,000 62,700 10,000 90,700 254,700 12,000 21,100 2,500 3,000 3,200
58,200 58,200
41,800 100,000
120,000 18,000 23,000 56,000 217,000 35,000 2,700 37,700 254,700 11,000
60,000 16,000 13,000 89,000
11,000 100,000
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11
(4) An impairment review at 31 December 20X9 revealed that goodwill in respect of Steele Ltd had fallen in value over the year by CU500. By 1 January 20X9 this goodwill had already suffered impairments totalling CU1,700. Requirements (a) Prepare the consolidated balance sheet of Close Ltd and its subsidiary Steele Ltd as at 31 December 20X9. (12 marks)
(b) Explain the adjustments necessary in respect of intra-group sales when preparing the consolidated balance sheet of the Close Ltd group. (6 marks) (18 marks) Now, go back to the Learning Objectives in the Introduction. If you are satisfied you have achieved these objectives, please tick them off.
417
Technical reference
For a comprehensive Technical reference section, covering all aspects of group accounts (except group cash flow statements) see Chapter 15.
418
11
Answers to Self-test
1 C Yum Ltd
90%
75%
Peep Ltd Shares in Peep Ltd Net assets acquired (90% 300,000) Goodwill Shares in Pitti Ltd Net assets acquired (75% 160,000) Discount on acquisition
Pitti Ltd CU 360,000 (270,000) 90,000 100,000 120,000 (20,000)*
* Credited to the consolidated income statement in the period in which the acquisition is made (i.e. on 31 December 20X6). 2 B Black Ltd only No post-acquisition prots have yet arisen in Red Ltd. 3 D Milton CU'000 500 (220) 280 Keynes CU'000 200 (90) 110 Adjustment CU'000 +2 22 +20 Consolidated CU'000 680 (290) 390 CU'000 24,000
Current assets Current liabilities 4 C Laker Hammond Less: Intra-group indebtedness 5 B
CU 6,000 7,520 (500) 13,020
CU'000 Austen Ltd Kipling Ltd Dickens Ltd Less: Cash in transit
CU'000 50 30
40 (2) 38 118
Less: Intra-group receivables Owed to Kipling Ltd (2 + 3 + 4) Owed to Dickens
9 3 (12) 106
419
Financial accounting 6 B Ho Ltd Su Ltd Ltdshare of post-acquisition retained earnings (60% ((700 Ho s 40) 300)) 7 A Tottenham Ltd Chelsea Ltd (10,000 5%) CU 40,000 500 40,500 CU 750 216 966
Dividends declared after the year end will be recognised in the following yearfinancial s statements. Only the MIpercentage of dividends payable will appear in consolidated current s liabilities. 8 B Carrying amount Prot element (25/125) Cost CU 15,000 (3,000) 12,000
Bass Ltd (the parent company) is the seller of the inventory. Therefore the adjustment does not affect the minority interest. 9 C Oxford Ltd Cambridge Ltd In transit to Cambridge Ltd Less: PURP ((40 + 20) 20%) 10 B Is CU 40,000 (8,000) 32,000 Should be CU 42,000 (18,000) 24,000 CU'000 290 160 20 (12) 458
Cost Accumulated depreciation NBV
Adjustment required Dr Stafford Ltd retained earnings CU8,000, Cr Property, plant and equipment NBV CU8,000. Property, plant and equipment in consolidated balance sheet = 260,000 + 80,000 8,000 = CU332,000 (B) 11 D Carrying amount at 1 January 20X7 (1/4 24,000) Add: Prot on disposal Sale price Is CU 10,000 (2,500) 7,500 CU 6,000 4,000 10,000 Should be CU 24,000 (24,000)
Cost Accumulated depreciation Carrying amount
420
11
CU Consolidated property, plant and equipment Makepeace Ltd Dempsey Ltd Less: Intra-group prot 12 A CU Minority interest Ordinary shares (25% (200,000 + 60,000)) Consolidated retained earnings Lynton Ltd Pinner Ltd (75% (60,000 24,000)) Point to note Redeemable preference shares are classied as liabilities. 13 B Cost Net assets acquired (80% 150,000) Discount on acquisition 14 C CU Mabbutt Ltd Cost of investment Less: Share of net assets acquired Share capital Retained earnings Goodwill Impairment to date Balance c/f Waddle Ltd Cost of investment Less: Share of net assets acquired Share capital Retained earnings CU CU 35,000 15,000 21,000 36,000 2/3 CU 77,000 (120,000) (43,000) 65,000 76,000 45,000 (7,500) 113,500
500,000 27,000 527,000
(24,000) 11,000 (4,400) 6,600 CU 20,000
20,000 16,000 36,000 75%
(27,000) (7,000) *
* Recognised in the consolidated income statement in the year in which the acquisition was made. 15 A Share of net assets acquired (60% (400 + 120 + (3/12 60))) Less: Discount arising on acquisition Cost of investment CU'000 321 (3) 318
421
Financial accounting 16 C (1) DR Current assets in H with interest receivable CR Retained earnings of H CU'000 15 CU'000 15
To account for the interest receivable by Hill Ltd (2) DR Current liabilities in D CR Current assets in H CU'000 15 CU'000 15
To cancel intra-group balances for interest there will be no o/s balances for the dividends as they have been paid Summary DR Current liabilities CR Retained earnings of H 17 D The loan is not in Heronaccounts. On consolidation Sparrowasset will cancel with Swift s s s liability. 18 D Ugly Ltd Less: PURP (2/3 15,000 25/125 ) Net assets acquired 19 B Cost of investment Less: Goodwill Nasty Ltd Fair value of net assets Minority interest (20% 230,000) 20 C CU'000 Consolidated capital and reserves Ordinary share capital Revaluation reserve (25 15) Retained earnings Fallin Ltd Gaydon Ltd (135 25) Goodwill impairment to date CU'000 100 10 340 110 (6) 444 554 CU 226,000 (42,000) 184,000 100/80 230,000 46,000 CU 40,000 (2,000) 20,000 58,000 CU'000 15 CU'000 15
422
11
21
A CU Cost of investment Less: Share of net assets acquired Share capital Share premium Retained earnings 1 October 20X1 Nine months ( 9/12 9,000) Goodwill CU 20,000
1,000 2,000 12,000 6,750 21,750 70% (15,225) 4,775
Questions 22 to 26 VW Ltd
100%
80%
Polo Ltd 22 B
Golf Ltd
Minority interest = 20% (50,000 + 70,000) = CU24,000 23 B VW Ltd Polo Ltd Golf Ltd CU'000 150 90 80 320
Less: PURP Note (3) (15,000 50/150 in VW Ltd's retained earnings) Note (4) (1/2 70,000 - 50,000 in Polo Ltd's retained earnings) 24 D VW Ltd Less: Intra-group receivable Polo Ltd Golf Ltd Less: Intra-group receivable
(5) (10) 305
CU'000 250 (20) 40 20 (10) 280
423
Financial accounting 25 B CU Shares in Polo Ltd Net assets acquired Share capital Retained earnings Goodwill Shares in Golf Ltd Net assets acquired Share capital Retained earnings (70 30) Group share ( 80%) Discount on acquisition Credited to CIS in period of acquisition 26 C VW Ltd Less: PURP Polo Ltd ((40,000 10,000 PURP) 30,000) Golf Ltd (80% 30,000) Discount on acquisition of Golf Ltd 27 CRAWFORD LTD PART II Consolidated balance sheet as at 30 June 20X0 CU ASSETS Non-current assets Property, plant and equipment (26,500 + 12,500) Intangibles (W1) Current assets (25,000 + 12,000) Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium account Retained earnings (W3) Attributable to equity holders of Crawford Ltd Minority interest (W2) Equity Non-current liabilities Current liabilities (7,000 + 7,500) Total equity and liabilities WORKINGS (1) Goodwill Cost of shares Net assets acquired (2/3 3,000) Impairment to date (210 + 40) Balance c/f CU 2,500 (2,000) 500 (250) 250 CU 90,000 (5,000) 85,000 24,000 2,000 111,000 CU 150,000
100,000 30,000 (130,000) 20,000 70,000 50,000 40,000 90,000 (72,000) (2,000)
39,000 250 39,250 37,000 76,250
20,000 6,000 18,083 44,083 5,667 49,750 12,000 14,500 76,250
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(2) Minority interest 1/3 17,000 (3) Retained earnings Crawford Ltd Dietrich Ltd (2/3 14,000) Less: Goodwill impairment to date (W1) 28 DUBLIN LTD Consolidated balance sheet as at 31 December 20X9 CU ASSETS Non-current assets Property, plant and equipment (90,000 + 60,000 + 50,000) Intangibles (W3) Current assets (215,000 + 50,000 + 30,000) Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Retained earnings (W5) Attributable to equity holders of Dublin Ltd Minority interest (W4) Equity Current liabilities (150,000 + 20,000 + 24,000) Total equity and liabilities WORKINGS (1) Group structure Dublin Ltd 80% 75% CU 9,000 9,333 (250) 18,083 CU 5,667
200,000 2,700 202,700 295,000 497,700
190,000 81,700 271,700 32,000 303,700 194,000 497,700
Shannon Ltd (2) Net assets
Belfast Ltd Balance sheet date CU 50,000 10,000 30,000 90,000 40,000 16,000 56,000 Acquisition date CU 50,000 10,000 20,000 80,000 40,000 16,000 56,000 Postacquisition CU 10,000
Shannon Ltd Share capital Revaluation reserve Retained earnings Belfast Ltd Share capital Retained earnings
425
Financial accounting (3) Goodwill Shannon Ltd CU 50,000 (64,000) (14,000) 14,000 (42,000) 3,000 (300) 2,700 Belfast Ltd CU 45,000
Cost of shares Net assets acquired Shannon Ltd (80% 80,000) (W2) Belfast Ltd (75% 56,000) (W2) (Discount on acquisition)/goodwill Credited/(impairment) to date Balance c/f (4) Minority interest Shannon Ltd (20% 90,000 (W2)) Belfast Ltd (25% 56,000 (W2)) (5) Retained earnings Dublin Ltd Shannon Ltd (80% 10,000 (W2)) Belfast Ltd (75% nil (W2)) Less: Goodwill impairment to date (W3) Add: Discount on acquisition (W3) 29 EDINBURGH LTD Consolidated balance sheet as at 31 December 20X5 ASSETS Non-current assets Property, plant and equipment (147,000 + 82,000) Intangibles (W3) Investments (80,000 63,000 12,000) Current assets Inventories (73,200 + 35,200) Trade and other receivables (82,100 + 46,900) Cash and cash equivalents (8,000 + 25,150 + 6,700) Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Revaluation reserve (W6) Retained earnings (W5) Attributable to equity holders of Edinburgh Ltd Minority interest (W4) Equity Non-current liabilities Borrowings (20,000 12,000) Current liabilities Trade and other payables (123,000 + 50,000) Total equity and liabilities
CU 18,000 14,000 32,000
CU 60,000 8,000 (300) 14,000 81,700
CU
CU 229,000 8,750 5,000 242,750
108,400 129,000 39,850 277,250 520,000
250,000 12,000 54,750 316,750 22,250 339,000 8,000
173,000 520,000
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WORKINGS (1) Group structure Edinburgh Ltd
80%
Glasgow Ltd (2) Net assets of Glasgow Ltd Balance sheet date CU 50,000 6,250 15,000 40,000 111,250 Acquisition date CU 50,000 6,250 10,000 66,250 Postacquisition CU 15,000 30,000
Share capital Share premium Revaluation reserve Revaluation earnings (3) Goodwill Cost of shares Net assets acquired (80% 66,250) (W2) Impairment to date Balance c/f (4) Minority interest 20% 111,250 (W2) (5) Retained earnings Edinburgh Ltd Glasgow Ltd (80% 30,000 (W2)) Less: Goodwill impairment to date (W3) (6) Revaluation reserve Glasgow Ltd (80% 15,000 (W2)) 30 CLOSE LTD (a)
CU 63,000 (53,000) 10,000 (1,250) 8,750
CU 22,250
CU 32,000 24,000 (1,250) 54,750
CU 12,000
Consolidated balance sheet as at 31 December 20X9 ASSETS Non-current assets Property, plant and equipment (80,000 + 58,200)) Intangibles (W3) Current assets Inventories (18,000 + 12,000 800)) Trade and other receivables (62,700 + 21,100) Investments Cash and cash equivalents (10,000 + 3,000 + 500) Total assets CU CU 138,200 14,600 152,800 29,200 83,800 2,500 13,500 129,000 281,800
427
Financial accounting EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium account Revaluation reserve Retained earnings (W5) Attributable to equity holders of Close Ltd Minority interest (W4) Equity Current liabilities Trade and other payables (35,000 + 11,000)) Total equity and liabilities (b) Adjustments When group companies have been trading with each other two separate adjustments may be required in the consolidated balance sheet. (i) Elimination of unrealised prots If one company holds inventories at the year end which have been acquired from another group company, this will include a prot element that is unrealised from a group perspective. Here Steele Ltd has sold goods to Close Ltd at cost plus 25%. The mark-up of 25% will only become realised when the goods are sold to a third party. Therefore if any intra-group inventory is still held at the year end, it must be eliminated from the consolidated accounts. This will require an adjustment of CU800 (4,000 25/125) which is always made against the selling companyretained earnings, i.e. s DR CU 800 CR CU 800
120,000 18,000 23,000 57,160 218,160 17,640 235,800 46,000 281,800
Steele Ltdretained earnings (W2) s Consolidated inventory
As well as eliminating the unrealised prot, this reduces inventory back to its original cost to the group. (ii) Contra out intra-group balances As group companies are effectively treated as one entity, any intra-group balances must be eliminated on consolidation. Here, intra-group current accounts have arisen as a result of the intra-group trading and these must be contraout. Before this can be done the current d accounts must be brought into agreement by adjusting the accounts of the 'receiving' company (here Steele Ltd) for the cheque in-transit, i.e. DR CU 500 CR CU 500
Cash Current account
This will reduce the current account receivable to CU2,700, which means that it now agrees with the payable balance shown in the accounts of Close Ltd. The balance can then be contraout, i.e. d DR CU 2,700 CR CU 2,700
Current account in Close Ltd Current account in Steele Ltd
428
11
WORKINGS (1) Group structure Close Ltd
80%
Steele Ltd (2) Net assets of Steele Ltd Balance sheet date CU CU 60,000 16,000 13,000 (800) 12,200 88,200 (3) Goodwill Cost of shares Less: Net assets acquired (80% 84,000 (W2)) Impairment to date (500 + 1,700) Balance c/f (4) Minority interest Share of net assets (20% 88,200 (W2)) (5) Retained earnings Close Ltd Steele Ltd (80% 4,200 (W2)) Less Goodwill impairment to date (W3) CU 56,000 3,360 (2,200) 57,160 CU 17,640 CU 84,000 (67,200) 16,800 (2,200) 14,600 8,000 84,000 4,200 Acquisition date CU 60,000 16,000 Postacquisition CU
Share capital Revaluation reserve Retained earnings Per question Less: PURP (4,000 25/125)
429
Answers to Interactive questions
Answer to Interactive question 1

P Ltd has paid CU10,000 to buy 75% of S Ltd's net assets of (16,000 4,000) = CU12,000 Consideration Less: Share of net assets acquired (75% 12,000) Goodwill CU 10,000 (9,000) 1,000

Rik Ltd: Consolidated balance sheet as at 31 December 20X1 CU Non-current assets Property, plant and equipment (100,000 + 40,000 + 10,000) Intangibles (W3) Current assets (45,000 + 40,000 + 25,000) Capital and reserves Called up share capital Retained earnings (W5) Attributable to equity holders of Rik Ltd Minority interest (W4) Equity Liabilities (30,000 + 20,000 + 10,000) WORKINGS (1) Group structure Rik Ltd 150,000 6,667 156,667 110,000 266,667 50,000 133,334 183,334 23,333 206,667 60,000 266,667
75%
2/3
Viv Ltd (2) Net assets
Neil Ltd Balance sheet date CU Postacquisition CU 36,000
Acquisition CU 20,000 4,000 24,000 10,000 1,000 11,000
Viv Ltd Share capital Retained earnings Neil Ltd Share capital Retained earnings
20,000 40,000 60,000 10,000 15,000 25,000
14,000
430
11
(3) Goodwill Viv Ltd CU 25,000 (18,000) 7,000 (3,000) 4,000 (7,333) 2,667 2,667 9,667 (3,000) 6,667 Neil Ltd CU 10,000 Total CU
Cost of investment Less: Share of net assets acquired Viv Ltd (75% 24,000 (W2)) Neil Ltd (2/3 11,000 (W2)) Goodwill Impairment to date Balance c/f (4) Minority interest Viv Ltd Share of net assets at BS date (25% 60,000 (W2)) Neil Ltd Share of net assets at BS date (1/3 25,000 (W2)) (5) Retained earnings
CU 15,000 8,333 23,333
Rik Ltd Viv Ltd Share of post-acquisition retained earnings (75% 36,000 (W2)) Neil Ltd Share of post-acquisition retained earnings (2/3 14,000 (W2)) Goodwill impairment to date (W3)
CU 100,000 27,000 9,334 (3,000) 133,334

(a) Net assets (W2) Balance sheet date CU 1,000 15,600 16,600 Acquisition CU 1,000 15,250 16,250 Postacquisition CU 350
Share capital Retained earnings (15,000 + (5/12 (15,600 15,000))) (b) Goodwill (W3) Cost of investment Less: Share of net assets acquired (80% 16,250 (W2)) (c)
CU 20,000 (13,000) 7,000
Profit from S Ltd included in consolidated retained earnings Share of post-acquisition retained earnings of S Ltd (80% 350 (W2)) CU 280
(d) (i)
Pre-acquisition earnings Retained earnings per balance sheet Add back: Dividend paid Total earnings before dividend Pre-acquisition earnings (5/12 17,600) CU 15,600 2,000 17,600 7,333
(ii)
Post-acquisition earnings Total earnings before dividend = 7/12 = Less: Dividend paid 17,600 10,267 (2,000) 8,267
431

(a) Recording of dividends in individual companies' books Impala Ltd's dividend Impala Ltd's books DR Retained earnings CR Payables Springbok Ltd's dividend Springbok Ltd's books DR Retained earnings CR Payables (Due to minority interest CU1,250) Impala Ltd's books DR Receivables (75% 5,000) CR Retained earnings Notes 1 2 Include in retained earnings working (W5). Include in net assets working (W2). CU 10,000 1 10,000 CU
5,000 2 5,000
3,750 3,7501
(b) In consolidation workings (1) Group structure Impala Ltd
75%
Springbok Ltd (2) Net assets of Springbok Ltd Balance sheet date CU Share capital Retained earnings Per question Dividends CU 25,000 Acquisition CU 25,000 Postacquisition CU
45,000 (5,000) 40,000 65,000 20,000 45,000 20,000
(4) Minority interest 25% 65,000 (W2) (5) Retained earnings Impala Ltd per question Dividends declared Dividends from Springbok Ltd Share of Springbok Ltd post-acquisition (75% 20,000) (W2) CU 60,000 (10,000) 3,750 15,000 68,750 CU 16,250
432
11
(c)
In consolidated balance sheet CU Payables: Declared dividends payable Parent company Minority interest 10,000 1,250

DR Seller's (S Ltd's) retained earnings (adjust in net assets working) CR Inventories in CBS (1/2 6,000) WORKINGS (1) Group structure P Ltd 80% CU 3,000 CU 3,000
S Ltd (2) S Ltd net assets Balance sheet date CU Share capital Retained earnings Per question Less: PURP CU 10,000 Acquistion CU 10,000 Postacquisition CU
65,000 (3,000) 62,000 72,000 20,000 30,000 42,000 CU 14,400 CU 100,000 33,600 133,600
(4) Minority interest Share of net assets (20% 72,000) (5) Retained earnings P Ltd Share of S Ltd (80% 42,000)

Following the transfer the asset will be included at Cost Less: Depreciation 20% Had the transfer not been made, the asset would stand in the books at Cost Less: Accumulated depreciation at date of 'transfer' Provision for current year (CU20,000 20%) CU 20,000 (8,000) (4,000) 8,000 CU 15,000 (3,000) 12,000
433
Financial accounting Overall adjustment in CBS DR Seller's (P Ltd's) retained earnings CR Non-current assets CU 4,000 CU 4,000

(1) Group structure P Ltd 60% S Ltd (2) Net assets of S Ltd BS date = Acquisition date CU CU 20,000 10,000 85,000 (5,000) 80,000 110,000 (3) Goodwill Cost of investment Less: Share of FV of net assets acquired (60% 110,000 (W2)) CU 80,000 (66,000) 14,000
Share capital Revaluation (30,000 20,000) Retained earnings Per question Less: Goodwill

Following the transfer the asset will be included at Carrying amount of plant in CBS (40,000 80%) Carrying amount in William Ltd's BS (40,000 85% 85%) Increase in carrying amount CU 3,100 CU 32,000 28,900 3,100 CU 2,635 465
DR CR CR
Non-current assets Consolidated retained earnings (85%) Minority interest (15%)
434

FA Chapter 11 Group Accounts Consolidated Balance Sheet

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FA Chapter 11 Group Accounts Consolidated Balance Sheet

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chapter 11

Group accounts: consolidated balance sheet

The Institute of Chartered Accountants in England and Wales, March 2009

Specific syllabus references for this chapter are: 1d,g, 3d,e.

Stop and think

The Institute of Chartered Accountants in England and Wales, March 2009

GROUP ACCOUNTS: CONSOLIDATED BALANCE SHEET

The Institute of Chartered Accountants in England and Wales, March 2009

Consolidated balance sheet

Worked example: Cancellation

The Institute of Chartered Accountants in England and Wales, March 2009

GROUP ACCOUNTS: CONSOLIDATED BALANCE SHEET

Interactive question 1: Goodwill

[Difficulty level: Easy]

The Institute of Chartered Accountants in England and Wales, March 2009

3 Consolidated balance sheet workings

The Institute of Chartered Accountants in England and Wales, March 2009

GROUP ACCOUNTS: CONSOLIDATED BALANCE SHEET

Interactive question 2: Consolidated balance sheet workings [Difficulty level: Easy]

40,000 80,000 20,000 40,000 60,000 20,000 80,000

25,000 35,000 10,000 15,000 25,000 10,000 35,000

The Institute of Chartered Accountants in England and Wales, March 2009

The Institute of Chartered Accountants in England and Wales, March 2009

GROUP ACCOUNTS: CONSOLIDATED BALANCE SHEET

Interactive question 3: Mid-year acquisition

The Institute of Chartered Accountants in England and Wales, March 2009

The single entity concept

P Eliminate effect of transactions between group members Single entity concept S

Loans, debentures and redeemable preference shares

The Institute of Chartered Accountants in England and Wales, March 2009

GROUP ACCOUNTS: CONSOLIDATED BALANCE SHEET

Worked example: Intra-group trading

Receivable from Springbok Ltd Payable to Impala Ltd

Solution Steps 1 and 2

The Institute of Chartered Accountants in England and Wales, March 2009

with declared dividend payable

with share of dividend receivable from S

Interactive question 4: Dividends

[Difficulty level: Intermediate]

The Institute of Chartered Accountants in England and Wales, March 2009

GROUP ACCOUNTS: CONSOLIDATED BALANCE SHEET

(b) In consolidation workings (1) Group structure Impala Ltd

The Institute of Chartered Accountants in England and Wales, March 2009

6 Unrealised intra-group profit

Parent sells goods to subsidiary

Worked example: Intra-group profit (P S)

The Institute of Chartered Accountants in England and Wales, March 2009

GROUP ACCOUNTS: CONSOLIDATED BALANCE SHEET

Subsidiary sells goods to parent

Worked example: Intra-group profit (S P)

Interactive question 5: Unrealised profits

[Difficulty level: Intermediate]

Assets Share capital Retained earnings Equity Liabilities

The Institute of Chartered Accountants in England and Wales, March 2009

Non-current asset transfers

The Institute of Chartered Accountants in England and Wales, March 2009

GROUP ACCOUNTS: CONSOLIDATED BALANCE SHEET

Parent sells non-current asset to subsidiary

Interactive question 6: Non-current asset transfers

[Difficulty level: Easy]

The Institute of Chartered Accountants in England and Wales, March 2009

Subsidiary sells non-current asset to parent

7 Fair value adjustments

Reflecting fair values