The Consolidated Statement of Financial Position: WWW - Xisu.edu - CN

Chapter 9
The consolidated statement of

financial position
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Contents
1. IAS summary of consolidation procedures
2. Non-controlling interest
3. Dividends paid by a subsidiary
4. Goodwill arising on consolidation
5. A technique of consolidation
6. Intra-group trading
7. Intra-group sales of non-current assets
Contents
8. Summary consolidated statement of financial position
9. Acquisition of a subsidiary during its accounting period

10. Dividends and pre-acquisition profits
11. Fair values in acquisition accounting
IAS summary of consolidation

procedures
Accounting standards: IAS 27

Basic procedure
(a) The carrying amount of the parents
investment in each subsidiary and the parents
portion of equity of each subsidiary are
eliminated or cancelled
(b) Non-controlling interests in the net income
of consolidated subsidiaries are adjusted
against group income
(c) Non-controlling interests in the net assets
of consolidated subsidiaries should be
presented separately in the consolidated
statement of financial position

procedures
Cancellation and part cancellation

The preparation consists of two procedures:
Take the individual accounts of the parent company and
each subsidiary and cancel out items which appear as a
asset in one company and a liability in another
Add together all the un-cancelled assets and liabilities
throughout the group
Items requires cancellation:

The asset shares in subsidiary companies which appears
in the parent companys accounts will be matched with the
liabilitys share capital in the subsidiarys accounts
There may be intra-group trading.

procedures
Part cancellation
An item may appear in the statements
of financial position of a parent company
and its subsidiary, but not at the same
amounts
The remaining un-cancelled will appear
in the consolidated statements of financial
position
Goodwill arising from consolidation
Non-controlling interest
Non-controlling interest can be valued at:
(a) Share of net assets; or
(b) Fair value (per IFRS 3 revised)
Fair value can be based on MV of shares, or
you may be given the FV.
Valuation of the NCI will affect the goodwill
calculation
Procedure
(a) Aggregate the assets and liabilities in the
statement of financial position is 100%p+100%s
irrespectively of how much actually own
This shows that the amount of net assets controlled by
the group.
(b) Share capital in that of the parent only

(c) Calculate the non-controlling interest share
of the subsidiarys net assets
(d) Balance of subsidiarys reserves are
consolidated

Goodwill represents the difference between
the amount paid to acquire the net assets of a

subsidiary and the fair value of those net assets.
It may be positive or negative.
Goodwill arising on consolidation is the

difference between the consideration transferred
plus the non-controlling interest and the fair
value of the identifiable assets and liabilities
acquired.

Goodwill
Consideration transferred
Less: Net fair value of identifiable
assets, liabilities
and contingent liabilities
(X)
X
X
NCI
Group
$
$
$
Consideration transferred/Fair value of
non-controlling interests
X
X
Less:
Net fair value of identifiable
assets
acquired and liabilities assumed X
Group/NCI %
(X)
(X)
X
X

Example: Goodwill and pre-acquisition profits
Sing Co acquired the ordinary shares of Wing Co on 31 March when the draft
statement of financial position of each company were as follows.
SING CO
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH
Assets
Non-current assets
Investment in 50,000 shares of Wing Co at cost
Current assets
40,000
Total assets
Equity and liabilities
Equity
Ordinary shares
75,000
Retained earnings
Total equity and liabilities
80,000
12,000
45,000
120,000

Example: Goodwill and pre-acquisition profits
WING CO
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH
Current assets
60,000
Equity
50,000 ordinary shares of 1 each
Retained earnings
50,000
10,000
60,000

Solution The technique to adopt here is to produce a new working
Goodwill . A formula is working out below.
Good will
Non-controlling interest at acquisition
Net assets acquired as represented by :

Ordinary share capital
Share premium
Retained earnings on acquisition
X
X
X
(X)
X
Solution:
Goodwill
Applying this to our example will look like this

Non-controlling interest at acquisition
Net assets acquired as represented by :
Ordinary share capital
80,000
80,000
50,000
10,000
(60,000)
20,000
Solution:
Goodwill
SING CO
CONSOLIDATED FINANCIAL STATEMENT OF FINANCIAL POSITION
Assets
Non-current assets
Goodwill arising on consolidation
Current assets
Equity
Ordinary shares
Retained earnings
20,000
100,000
120,000
75,000
45,000

Goodwill NCI at fair value
Goodwill is likely to be higher when NCI is valued at
FV. This excess is termed:
Goodwill attributable to the NCI.
Non- controlling interest at year end then becomes:
NCI% of S net assets
PURP (if applicable)
(X)
Goodwill attributable to NCI
X
X
X

Example:
P acquired 75% of the shares in S on 1 January 2007 when S had trained earnings of
15,000. The market share price of Ss shares just before the date of acquisition
was 1.60. P values non-controlling interest at fair value. Good will is not impaired.
The statements of financial position of P and S are as follows:
P( )
S( )
Property, plant and equipment
60,000
50,000
Shares in S
68,000
Current assets
128,000
50,000
52,000
35,000
180,000
85,000
Share capital - 1shares
100,000
50,000
Retained earnings
70,000
25,000
170,000
75,000
10,000
10,000
180,000
85,000
Current liabilities

Solution
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Assets
Goodwill(w1)
Current assets(52,000+35,000)
Total assets
Equity and liabilities
Equity attributable to the owners of p
Share capital
Retained earnings(W2)
Non-current assets
Total equity
Current liabilities(10,000+10,000)
110,000
23,000
87,000
220,000
100,000
77,500
177,500
22,500
200,000
20,000
220,000
Solution:
Workings
1.Goodwill
Non-controlling interest at acquisition (12,500 shares
@ 1.60)
Net assets of S at acquisition(50,000+15,000)
68,000
20,000
(65,000)
23,000
Goodwill (parent and non-controlling interest)

20,000
Non-controlling interest at fair value (as above)
(16,250)
Non-controlling share of net assets at acquisition
3,750
Goodwill attributable to non-controlling interest
Solution:
2.Retained earnings
Per statement of financial position
P( )
S( )
70,000
25,000
(15,000)
Less pre-acquisition
10,000
Group share of S (10,00025%)
7,500
Group retained earnings
77,500
3.Non-controlling interest at year end

Share of net assets of S(75,00025%)
Goodwill(W1)
18,750
3,750
22,500

Impairment of goodwill
Impairment tests are conducted at least at
each year end. Any resulting impairment
loss is first recognised against
consolidated goodwill.
A technique of consolidation
Aggregate
the assets and
liabilities
Calculate
retained
earnings
Calculate
non-controlling
interest
Cancel
common items
Calculate
goodwill
Example
The draft statement of financial position of Ping Co and Pong Co June 204 were as follows
PING CO
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 204
Assets
Non-current assets
50,000
20,000 ordinary shares in Pong Co at cost
30,000
80,000
Current assets
Inventory
3,000
Receivables
16,000
Cash
2,000
21,000
Total assets
101,000
Example
Equity
Ordinary shares of 1 each
45,000
Revaluation surplus
12,000
Retained earnings
26,000
83,000
Current liabilities
Owed to Pong Co
8,000
Trade payables
10,000
18,000
101,000
Example
PING CO STATEMENT OF FINANCIAL POSITION AS AT JUNE 2004
Assets
40,000
Current assets
Inventory
8,000
Owed by Ping Co
10,000
Receivables
7,000
25,000
Total assets
Equity
Revaluation surplus
Retained earnings
Current liabilities
Owed to Pong Co
Trade payables
65,000
25,000
5,000
28,000
58,000
70,000
65,000
Solution:
1. Agree current accounts
Ping Co has goods in transit of 2,000making its total inventory 3,000+ 2,000= 5,000and
its liability to Pong Co 8,000+ 2,000= 10,000
Cancel common items: these are the current accounts between the two companies of 10,000
2. Calculate goodwill
Goodwill
30,000
Non-controlling interest(w3)
7,200
Net assets acquired as represented by:
37,200
Ordinary shares capital
25,000
Revaluation surplus on acquisition
5,000
6,000
(36,000)
Goodwill
1,200
Solution:
3.Calculate non-controlling interest
(a) At acquisition
Pong Cos net assets(w2)
36,000
20%
7,200
(b) At year end
Pong Cos net assets(65,000-7,000)
58,000
20%
11,600
4. Calculate consolidated reserves

Consolidated revaluation surplus
Ping Co
Share of Pong Cos post acquisition revaluation
surplus
12,000
-12,000
Solution:
Consolidated retained earnings
Ping
Pong
26,000
28,000
Retained earnings per question
(6,000)
Less pre-acquisition
22,000
Share of Pong: 80%$22,000
17,600
43,600
5.Prepare the consolidated statement of financial position
PING CO
CONSOLIDATED STATEMENT OF FIANNCIAL POSITION AS AT 30 JUNE 204
Assets
Non-current assets
Property, plant and equipment ($50,000+$40,000)
90,000
Solution:
Intangible asset: goodwill
$
1,200
Current assets
Inventories($5,000+$40,000)
Receivables($16,000+$7,000)
Cash
13,000
23,000
2,000
38,000
129,200
Total assets
Equity
Revaluation surplus
Retained earnings
Current liabilities
Tradepayables($10,000+$7,000)
45,000
12,000
43,600
100,600
11,600
112,200
17,000
129,200
Intra-group trading
Unrealized profit
a Although A company makes a profit when it sells goods
to B, the group doesnt make a sale until an outside
customer buys the goods from B
(b) Any purchases from A Co, which remain unsold by B Co
will be included in Bs inventory.
Cost
External sales
Nil
Closing inventory at cost
Profit / Loss
nil
An adjustment
DEBIT
CREDIT Group inventory (statement of financial position)
Intra-group trading
Non-controlling interest in unrealized intra-group profits
11
Remove
only the
groups
shares of
the profit
loading
22
33
Remove the whole

Remove the whole profit without
charging the nonprofit loading
controlling interest
,charging the non- (to reduce group
controlling interest retained earnings
with their proportion by the whole profit
loading)
Three possibilities as regards the treatment of intra-group profits
Intra-group trading
Entries to learn
1
DEBIT
Group
retained
earnings
DEBIT
CREDIT
Noncontrolling
interest
Group inventory
(statement of
financial
position)
Intra-group sales of non-current assets
Consolidation
adjustments
To alter retained
earnings and
accumulated
depreciation so
that consolidated
depreciation is
based on the cost
to the group
To alter retained
earnings and noncurrent assets
cost so as to
remove any
element of
unrealized profit
or loss.
Intra-group sales of non-current assets
The double entry is as follows:

(a) Sale by parent
DEBT
CREDIT

Non-current assets
with the profit on disposal, less the additional depreciation
(b) Sale by subsidiary

DEBIT Group retained earnings
DEBIT
CREDIT Non-current assets
with the profit on disposal, less the additional depreciation
Summary: consolidated statement of

financial position
Purpose
To show the net assets with P controls and the

ownership of those assets
Net assets
Always 100%P plus 100%S providing P holds a majority of

voting rights
Share capital
P only
Reason
Simply reporting to the parent companys shareholders in

another form
Retained
earnings
100%P plus group share of post-acquisition retained

earnings of S less consolidation adjustments
Reason
To show the extent to which the group actually owns total

assets less liabilities
Non-controlling
interest
NIC shares of Ss consolidated net assets, or valuation at

fair value
Reason
To show the entity in a subsidiary not attributable to the

parent
Acquisition of a subsidiary during

its accounting
Profits
and before
acquisition
Necessary
to
distinguish
Profits
and after
acquisition
Dividends and pre-acquisition profits

Dividends paid by the subsidiary to its parent
company may only be credited to profit or loss in
the parents financial statement to the extent that
they are paid from post-acquisition profits.
Dividends received by the parent company from
pre-acquisition profits should be credited to
investment in subsidiarys account and treated as
reducing the cost of shares acquired.
The post-acquisition element is genuinely earned
by the parent and the pre-acquisition element
should be deducted from cost of the combination
Fair value in acquisition accounting
Goodwill.
Any excess consideration transferred

over the acquirers interest in the fair value of the
identifiable assets and liabilities acquired as at
the date of the exchange transaction
Fair value .The amount for which an asset

could be exchanged, or a liability settled,
between knowledgeable, willing parties in an
arms length transaction.

Fair value adjustment calculation
Two methods:
(a) The subsidiary company might incorporate
any necessary revaluation in its own books of
account
(b) The revaluations may be made as a
consolidation adjustment without being
incorporated in the subsidiary companys books.

the assets transferred by the acquirer,
the liabilities incurred by the acquirer (to former
owners of the acquiree), and
equity interests issued by the acquirer
Deferred consideration
Consideration that is to be paid in the future
should be discounted to present value to
determine its fair value
Contingent consideration
Contingent consideration (i.e. a payment
dependent on whether specified future events
occur or conditions are met, e.g. a profit target) is
measured at fair value taking into account the
probability of expected payment and the time
period to settlement

Cost of business combination
The general principal is the acquirer should measure the cost of
a business combination as the total of the fair value, at the date
of exchange, of the assets given, liabilities incurred or assumed,
and equity instruments issued by the acquirer, in exchange for
control of the acquiree.
The fair value of any deferred consideration is determined by
discounting the amounts payable to their present value at the
date of exchange.
Approach to the consolidated SFP

Step
Step
Step
Step
Step
Step
Step
Step
1
2
3
4
5
6
7
8
Group structure
Proforma
Assets & liabilities
Adjustments
Goodwill
Investment in associate
Retained earnings
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Chapter 9

The consolidated statement of

9. Acquisition of a subsidiary during its accounting period

IAS summary of consolidation

Accounting standards: IAS 27

IAS summary of consolidation

Cancellation and part cancellation

Items requires cancellation:

IAS summary of consolidation

Goodwill arising from consolidation

(b) Share capital in that of the parent only

Goodwill arising from consolidation

the amount paid to acquire the net assets of a

Goodwill arising on consolidation is the

Goodwill arising from consolidation

Goodwill arising from consolidation

Goodwill arising from consolidation

Goodwill arising from consolidation

Goodwill arising from consolidation

Non-controlling interest at acquisition

Net assets acquired as represented by :

Goodwill arising from consolidation

Applying this to our example will look like this

Goodwill arising from consolidation

Goodwill arising from consolidation

Goodwill arising from consolidation

Property, plant and equipment

Share capital - 1shares

Goodwill arising from consolidation

Goodwill arising from consolidation

Goodwill (parent and non-controlling interest)

Non-controlling share of net assets at acquisition

Goodwill attributable to non-controlling interest

Goodwill arising from consolidation

Group retained earnings

3.Non-controlling interest at year end

Goodwill arising from consolidation

20,000 ordinary shares in Pong Co at cost

Ordinary shares of 1 each

Total equity and liabilities

Net assets acquired as represented by:

Ordinary shares capital

Revaluation surplus on acquisition

Retained earnings on acquisition

Pong Cos net assets(w2)

(b) At year end

Pong Cos net assets(65,000-7,000)

4. Calculate consolidated reserves

Retained earnings per question

Share of Pong: 80%$22,000

Closing inventory at cost

Group retained earnings

CREDIT Group inventory (statement of financial position)

Remove the whole

Three possibilities as regards the treatment of intra-group profits

Intra-group sales of non-current assets

Intra-group sales of non-current assets

The double entry is as follows:

Group retained earnings

with the profit on disposal, less the additional depreciation

(b) Sale by subsidiary

Summary: consolidated statement of

To show the net assets with P controls and the