DipIFR-Session25 d08 Consolidated Statement of Comprehensive Income

SESSION 25 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Accountancy Tuition Centre (International Holdings) Ltd 2008 2501

Overview
Objectives
To explain the accounting treatment of subsidiaries in consolidated statements of
comprehensive income.

TREATMENT OF
GOODWILL
INTER-COMPANY
TRANSACTIONS AND
UNREALISED PROFIT
MID-YEAR
ACQUISITIONS
ENTITLEMENT OF
NON-CONTROLLING
INTEREST
Inclusion of subsidiarys
results
Dividends from subsidiary
acquired mid-year
Dividends
Inter-company items

CONSOLIDATED
STATEMENT OF
CHANGES IN EQUITY
IAS 1
Income generation
Control and ownership
INTRODUCTION
Basics

1 Introduction
1.1 Income generation
The statement of comprehensive income shows the income generated by
resources (= net assets in the statement of financial position ):
The parents own statement of comprehensive income includes dividend income
from subsidiary.
The consolidated statement of comprehensive income shows the
income generated by the groups resources (= net assets in
consolidated statement of financial position ).
The consolidated statement of comprehensive income is prepared on a basis consistent
with that used in the preparation of the consolidated statement of financial position.
1.2 Control and ownership
Consolidated statement of comprehensive income
$
Revenue X
[Parent + Subsidiary (100%) intercompany items]

Profit after tax (CONTROL) X

OWNERSHIP
Owners (equity holders) of the parent X
Non-controlling interests
( % subsidiarys profit after tax) X

Profit for the period X

Commentary
This reflects the profit or loss section of the statement of comprehensive income, any other
gains or losses for the period will be included within other comprehensive income. This
session focuses on the profit or loss component of the statement of comprehensive income.
The profit or loss shows the income generated from net assets under parents control.
On consolidation, dividends from subsidiary are replaced by parents share of subsidiarys
income and expenses (100%) line-by-line, as far as profit after tax.
Reflect ownership by identifying non-controlling interests share of subsidiarys profit after
tax of the group profit after tax in profit or loss, leaving profit attributable to owners of the
parent.
Eliminate effects of transactions between group members (single entity concept).

Commentary
For example, for interest paid by subsidiary to parent, cancel interest payable in subsidiarys
profit or loss against interest receivable in parents profit or loss.
2 Inter-company transactions and unrealised profit
2.1 Dividends
Dividends from subsidiary to parent are inter-company items:
Cancel parents dividend income from subsidiary against subsidiarys
dividends paid and proposed.
This leaves the non-controlling interests share of subsidiarys dividends.
Non-controlling interest in subsidiary in profit or loss is calculated on
profit after tax (before dividends), and therefore includes the non-
controlling interests share of subsidiarys dividends and retained profits.

Commentary
In short, simply ignore dividends from subsidiary on consolidation.
Dividend income in profit or loss will be dividends received from non-group
companies whilst dividends paid/payable of the parent only will be included in
the statement of changes in equity.
2.2 Inter-company items
2.2.1 Trading
Inter-company trading will be included in the revenue of one group company
and the purchases of another. Such inter-company items must be cancelled out
on consolidation (single entity concept) by taking the following steps:
add across parent and subsidiary revenue and cost of sales;
deduct value of inter-company sales from revenue and cost of sales.

Commentary
This adjustment has no effect on profit and hence will have no effect on the
non-controlling interests share of profit.
2.2.2 Unrealised profits on trading
If any items sold by one group company to another are included in inventory
(i.e. have not been sold on outside the group by the year end), their value must
be adjusted to the lower of cost and net realisable value to group (as for the
consolidated statement of financial position).
The adjustment will be made as a consolidation adjustment either against the
profits of the selling company or the profits of the parent, irrespective of the
direction of sale.

Commentary
Example 1 below looks at the impact of making the adjustment always against the parent
or always against the selling company. The example is provided for comparison
purposes; after this example all adjustments for unrealised profits will be made against
the selling company unless the question states otherwise.
Steps to set up an allowance for unrealised profit:
Calculate the amount of inventory remaining at the year end.
Calculate the inter-company profit included in it.
Make an allowance against the inventory to reduce it to cost to the
group (or net realisable value if lower).
Worked example 1

Whales owns 75% of Porpoise. The trading account for each company
for the year ended 31 March 2008 is as follows:
Whales Porpoise
$ $
Revenue 120,000 70,000
Cost of sales (80,000) (50,000)

Gross profit 40,000 20,000

During the year Porpoise made sales to Whales amounting to $30,000.
$15,000 of these sales were in inventory at the year end. Profit made
on the year end inventory items amounted to $2,000.

Required:

Calculate group revenue, cost of sales and gross profit.

Worked solution 1
Parent adjustment
Whales Porpoise Adjustment Consolidated
$ $ $ $
Revenue 120,000 70,000 (30,000) 160,000
Cost of sales per question (80,000) (50,000) 30,000
Unrealised profit (2,000) (102,000)

Gross profit 40,000 20,000 (2,000) 58,000

Non-controlling interests (25% 20,000) (5,000)

Seller adjustment
Whales Porpoise Adjustment Consolidated
$ $ $ $
Revenue 120,000 70,000 (30,000) 160,000
unrealised profit (2,000) (102,000)

Gross profit 40,000 18,000 58,000

Non-controlling interests (25% 18,000) (4,500)


Commentary
This example considers the different impact that the adjustment could have on the
calculation of non-controlling interests. From this point on all adjustments should be
made against the selling entitys profits unless the question states otherwise.
Any unrealised profit in opening inventory will be deducted from cost of sales of the
original selling company, thereby reversing the originating adjustment made against
the previous years closing inventory.

Commentary
The adjustment for unrealised profit is merely a timing adjustment. The period of recognition
of profit by the group is moved to a later period than that recognised by the single entity.
2.2.3 Non-current asset transfers
The consolidated statement of comprehensive income should include depreciation of
non-current assets based on cost to group and should exclude profit/loss on non-
current asset transfers between group members. This is consistent with treatment in
the consolidated statement of financial position .
Eliminate profit or loss on transfer and adjust depreciation in full (control).
These adjustments are made in full against the consolidated figures.
Worked example 2

Parent owns 80% of subsidiary. Parent transferred a non-current asset to subsidiary
on 1 January 2007 at a value of $15,000. The asset originally cost Parent $20,000
and depreciation to the date of transfer was $8,000. The asset had a useful life of 5
years when originally acquired, with a residual value of zero. The useful life at the
date of transfer remains at 3 years. A full years depreciation charge is made in the
year of acquisition and none in the year of disposal. Total depreciation for 2007 was
$700,000 for parent and $500,000 for subsidiary.

Required:

Show the adjustments required for the above transaction in the consolidated
statement of comprehensive income for the year ended 31 December 2007.

Worked solution 2 As a selling company adjustment
Parent Subsidiary Adjustment Consolidated
$ $ $
Per question 700,000 500,000 1,200,000
Asset unrealised profit
[15,000 (20,000 8,000)] 3,000 3,000
Depreciation adjustment
(15,000/3 years) 4,000 (1,000) (1,000)

1,202,000

This would be part of the profit after tax of subsidiary and
would therefore be shared with the non-controlling interests
3 Entitlement of non-controlling interests
3.1 Basics
The non-controlling interests share of subsidiarys profit after tax must be
shown, leaving group profit remaining.
Activity 1

Pathfinder owns 75% of Sultan . Statements of comprehensive income for the two
companies for the year ending 30 September 2007 are as follows:

Pathfinder Sultan
$ $
Revenue 100,000 50,000
Cost of sales (60,000) (30,000)

Expenses (20,000) (10,000)

Profit for the period 20,000 10,000

During the year, Pathfinder sold goods to Sultan for $20,000, at a gross profit margin
of 40%. Half of the goods remained in inventory at the year end.

Required:

Prepare the consolidated statement of comprehensive income of Pathfinder for
the year ended 30 September 2007.

Proforma solution
Consolidated statement of comprehensive income for the year ended 30 September 2007
$
Revenue
Cost of sales

Gross profit
Expenses

Profit

Attributable to:
Owners of the parent
Non-controlling interests (W3)

WORKINGS

(1) Group structure

(2) Consolidation schedule

Pathfinder Sultan Adjustment Consolidated
$ $ $ $
Revenue
Cost of sales
Expenses

Profit

(3) Non-controlling interests
$

(4) Unrealised profit

% $
Selling price
Cost
$
Gross profit

4 Mid-year acquisitions
4.1 Inclusion of subsidiarys results
Group accounts only include subsidiary from date of acquisition, i.e.
when control is gained. If subsidiary is acquired mid-year:
Consolidate subsidiary from date of acquisition;
Identify net assets at date of acquisition for goodwill (as for
consolidated statement of financial position );
Assume revenue and expenses accrue evenly over the year (unless
contrary is indicated). Therefore time-apportion totals for revenue
and costs, then deduct inter-company items.
Worked example 3

Parent acquired 75% of subsidiary on 1 April 2007. Extracts from the companies
statements of comprehensive income for the year ended 31 December 2007 are:
Parent Subsidiary
$ $
Revenue 100,000 75,000
Cost of sales (70,000) (60,000)


Since acquisition, parent has made sales to subsidiary of $15,000. None of these
goods remain in inventory at the year end.

Required:

Calculate revenue, cost of sales and gross profit for the group for the year
ending 31 December 2007.

Worked solution 3
Consolidated statement of comprehensive income

9
/
12

Parent Subsidiary Adjustment Consolidated
$ $ $ $
Revenue 100,000 56,250 (15,000) 141,250
Cost of sales (70,000) (45,000) 15,000 (100,000)

Gross profit 30,000 11,250 41,250

4.2 Dividends from subsidiary acquired mid-year
In calculating net assets at acquisition, assume profit after tax (i.e.
before dividends) accrues evenly over year, unless contrary is indicated.
Two ways to look at the dividend:
Treat subsidiarys dividends paid post-acquisition as being paid out of post
acquisition profits first. Only treat dividends as pre-acquisition once post-
acquisition profits have been fully exhausted by dividends.
Treat the dividend as arising evenly throughout the year.
5 Treatment of goodwill
IFRS 3 rules that goodwill arising on acquisition must be capitalised and
tested annually for impairment. Any fall in value is recognised as an expense
and charged to profit or loss in the period.
Any excess of the fair value of the assets and liabilities acquired over the cost
of the acquisition is credited to profit or loss immediately.
6 Consolidated statement of changes in equity
6.1 IAS 1
IAS 1 requires a statement of changes in equity to be included in a set of financial
statements, whether they are from a single entity perspective or that of a group.
The statement will reconcile how the equity position has changed during the period.
The consolidated statement will look at the movements from the point of the group,
but will include a reconciliation in respect the movement of non-controlling
interests share of group equity. The statement may include some of the following:
Opening balances
Cumulative effect of changes in accounting policy and prior period errors
Profit for the year
Ordinary dividends (parent plus non-controlling interests share of subsidiary)
Issue of shares
Equity component of convertible bond
Deferred tax implications (if any) to above items.

Illustration 1
NOVARTIS GROUP CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENTS
for the years ended December 31, 2006 and 2005
Notes
2006
USD millions
2005
USD millions
Net sales from continuing operations 3/4 36 031 31 005
Other revenues 718 314
Cost of goods sold

-10 299 -8 259
Gross profit from continuing operations

26 450 23 060
Marketing & sales

-10 454 -9 397
Research & development

-5 349 -4 825
General & administration

-1 957 -1 681
Other income & expense

-741 -355
Operating income from continuing operations 3 7 949 6 802
Income from associated companies 10 264 193
Financial income 5 354 461
Interest expense -266 -294
Income before taxes from continuing operations 8 301 7 162
Taxes 6 -1 282 -1 090
Net income from continuing operations 7 019 6 072
Net income from discontinuing operations 3 183 69
Group net income 7 202 6 141
Attributable to
Shareholders of Novartis AG 7 175 6 130
Minority interests 27 11

The accompanying notes form an integral part of the consolidated financial statements.


Worked example 4

The draft accounts of two companies at 31 March 2008 were as follows:
Statements of financial position
Hamble Group Jemima
$ $
Investment in Jemima at cost 3,440
Sundry assets 36,450 6,500

39,890 6,500

Share capital ($1 ordinary shares) 20,000 3,000
Retained earnings 19,890 3,500

39,890 6,500

Statements of comprehensive income
Hamble Group Jemima
$ $
Profit before tax 12,950 3,800
Tax (5,400) (2,150)

Profit after tax 7,550 1,650
Retained earnings b/d 12,340 1,850

Retained earnings c/f 19,890 3,500

Hamble and Jemima are both incorporated entities.
Hamble had acquired 90% of Jemima, on 1 April 2006, when the reserves of Jemima
were $700. Goodwill of $110 arose on the acquisition. This had been impaired by $22
in each year since the acquisition occurred.

Required:

Prepare extracts from the Hamble Group statement of financial position ,
statement of comprehensive income , and statement of changes in equity.

Worked solution 4
(1) Consolidated retained earnings 1 April 2007
$
Hamble Group 12,340
Jemima 90% (1,850 700) 1,035
Less Goodwill (22)

13,353

(2) Consolidated retained earnings 31 March 2008
$
Hamble Group 19,890
Jemima 90% (3,500 700) 2,520
Less Goodwill (22 2) (44)

22,366

Consolidated statement of financial position as at 31 March 2008
$
Goodwill (110 44) 66
Sundry assets (36,450 + 6,500) 42,950

43,016

Share capital 20,000
Retained earnings 22,366
Non-controlling interests (6,500 10%) 650

43,016

Consolidated statement of comprehensive income for the year ended 31
March 2008
Hamble Jemima Consolidated
$ $ $
Profit before taxation 12,950 3,800 16,750
Goodwill (22)
Taxation (5,400) (2,150) (7,550)

Profit after taxation 7,550 1,650 9,178

Attributable to:
Non-controlling interests (1,650 10%) 165
Owners of the parent 9,013

9,178

Consolidated statement of changes in equity for year ended 31 March 2008
Share Retained Total Non-controlling Total
capital earnings interest Equity
$ $ $ $ $
At 1 April 2007 20,000 13,353 33,353 485 33,838
Profit for year 9,013 9,013 165 9,178

At 31 March 2008 20,000 22,366 42,366 650 43,016

Commentary
Opening non-controlling interests is calculated as 10% of the share capital and the
retained earnings at 1 April 2007 (3,000 + 1,850).

Focus
You should be able to:
prepare a consolidated statement of comprehensive income for a simple group,
including an example where an acquisition occurs during the year and there is a
non-controlling interests;
report the effects of intra-group trading and other transactions including:
unrealised profits in inventory and non-current assets;
intra-group loans and interest and other intra-group charges; and
intra-group dividends, including those paid out of pre acquisition
profits; and
prepare a consolidated statement of changes in equity.
Activity solution
Solution 1
Consolidated statement of comprehensive income for the year ended 30 September 2007
$
Revenue 130,000
Cost of sales (74,000)

Gross profit 56,000
Expenses (30,000)

Profit 26,000

Attributable to:
Owners of the parent (balance) 23,500
Non-controlling interests (W3) (2,500)

26,000

WORKINGS
(a) (1) Group structure

Pathfinder

75%

Sultan

(2) Consolidation schedule
Pathfinder Sultan Adjustment Consolidated
$ $ $ $
Revenue 100,000 50,000 (20,000) 130,000

unrealised profit (W4) (4,000) (74,000)
Expenses (20,000) (10,000) (30,000)

Profit 26,000

(3) Non-controlling interests
$
Sultan 10,000 (W2) 25% = 2,500

(4) Unrealised profit
% $
Selling price 100 20,000
Cost (60) (12,000)
$
Gross profit 40 8,000 = 4,000

(5) Revenue
$
Pathfinder 100,000
Sultan 50,000
Inter company sales (20,000)

130,000

(6) Gross profit
$
Pathfinder 40,000
Sultan 20,000
Unrealised profit (4,000)

Profit 56,000

Therefore cost of sales could be taken as a balancing figure of 74,000.

DipIFR-Session25 d08 Consolidated Statement of Comprehensive Income

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SESSION 25 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Accountancy Tuition Centre (International Holdings) Ltd 2008 2501

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