CHAPTER 2
CONSOLIDATED FINANCIAL STATEMENTS
IFRS 10
Page
2.1
The outcomes for the chapter
2
2.2
Introduction
2
2.3
Definitions
3
2.4
Why the need for consolidated financial statements?
3
2.5
Accounting treatment of significant investments.
6
2.6
When does control exist?
6
2.7
Consolidation procedures
8
2.8
Wholly-owned subsidiaries: Consolidation on date of acquisition
9
2.9
Goodwill
11
2.10
Wholly-owned subsidiaries: Consolidation after date of acquisition
13
2.11
Wholly-owned subsidiaries: Intercompany transactions
16
2.12
Subsidiaries: Consolidation on date of acquisition
28
2.13
Subsidiaries: Consolidation after date of acquisition
30
2.14
Subsidiaries: Intercompany transactions
34
2.15
Conclusion
42
Questions
43
2 -1
CHAPTER 2
CONSOLIDATED FINANCIAL STATEMENTS
2.1
THE OUTCOMES FOR THE CHAPTER ARE TO:
2.1.1 define and identify a subsidiary company,
2.1.2 illustrate the accounting treatment of basic intercompany transactions between
a holding company and its subsidiary, and
2.1.3 prepare a consolidated statement of comprehensive income, statement of
changes in equity and statement of financial position for a simple group (holding
company with one subsidiary).
2.2
INTRODUCTION
A company can expand its operations by growing itself, or by purchasing
shares in another company and combining the two companies. The summary
below is a schematic representation of the different types of share
investments. Significant share investments are classified according to the
level of control that the investor has over the company in which it invests.
Investment in shares of another company
Simple share investments (FA389)
Speculative
purposes
Non-speculative
purposes
Significant share investments
Subsidiary
- Wholly-owned
- Partially owned
2 -2
Joint venture
(FA389)
Associates
(FA389)
2.3
DEFINITIONS (IFRS 10)
Control exists when an investor has power over the investee, and has
exposure to, or rights to variable returns from its involvement with the investee
and has the ability to use its power over the investee to affect the amount of
the investor’s returns.
A holding company is a company that controls one or more other entities.
A subsidiary is an entity controlled by another entity (holding company).
A wholly-owned subsidiary is a subsidiary that does not have any other
shareholders other than the holding company.
A group is a holding company and all its subsidiaries.
Consolidated financial statements are the financial statements of a group
where the assets, liabilities, equity, income and expenses of the holding
company and subsidiaries are presented as if it is a single entity.
2.4
WHY THE NEED FOR CONSOLIDATED FINANCIAL STATEMENTS?
Should a company need certain assets (tangible and/ or intangible) in order to
expand its operations, it can use one of the following two methods to acquire
these assets:
1. The assets concerned can be purchased directly by the company. The
cost price of the assets will then be disclosed in the next statement of
financial position of the company.
2. Purchase the entity which owns the assets.
Example - Option 1: The company acquires the assets themselves.
The statement of financial position of Keurboom Ltd. at a given time reflected
the following:
Assets
Current assets
Bank
R
40 000
Equity and liabilities
Equity attributable to shareholders of the holding company
Ordinary share capital
Retained earnings
10 000
30 000
40 000
Keurboom Ltd. then purchased fixed property for R25 000 and paid in cash.
The journal entry is as follows:
Dr Fixed property
Cr Bank
R25 000
R25 000
2 -3
Now the statement of financial position changes as follows:
R
Assets
Non-current assets
Fixed property
25 000
R25 000 paid for property
Current assets
Bank
15 000
40 000
Equity and liabilities
Equity attributable to owners of the holding company
Ordinary share capital
Retained earnings
10 000
30 000
40 000
Users of the financial statements can then immediately see from the statement
of financial position that there was an expansion of property, plant and
equipment by comparing the one statement of financial position with the next
statement of financial position.
Example - Option 2: The company acquires the entity (Matjies Ltd.)
owning the assets.
The statement of financial position of Matjies Ltd. at a given time reflected the
following:
Assets
Non-current assets
Fixed property
R
25 000
Equity and liabilities
Equity attributable to owners of the holding company
Ordinary share capital
25 000
Keurboom Ltd. intends to use the property owned by Matjies Ltd. for the
expansion of its business. If Keurboom Ltd. owns Matjies Ltd., it indirectly also
owns the fixed property. Keurboom Ltd. must therefore purchase all the shares
of Matjies Ltd. to become the owner of Matjies Ltd. Assume Keurboom Ltd.
purchases all the shares of Matjies Ltd. for R25 000.
Keurboom Ltd.
Purchase 100% of
Matjies Ltd.’s shares
Matjies Ltd.
The journal entry for the acquisition of the shares of Matjies Ltd.is as follows
in the accounting records of Keurboom Ltd.:
Dr Investment in Matjies Ltd.
Cr Bank
R25 000
R25 000
2 -4
If Keurboom Ltd. now publishes its next statement of financial position (below),
an expansion of those specific assets (fixed property) will not be reflected.
However, an increase in investments will be reflected. For all practical
purposes Keurboom Ltd. only gained control over the fixed property.
The statement of financial position of Keurboom Ltd. after the transaction will
then reflect the following:
Assets
Non-current assets
Investment in Matjies Ltd. (100% interest)
Current assets
Bank
Equity and liabilities
Equity attributable to shareholders of the holding company
Ordinary share capital
Retained earnings
R
25 000
15 000
40 000
10 000
30 000
40 000
Summary:
•
The statement of financial position of Keurboom Ltd. reflects an
investment of R25 000.
•
Keurboom Ltd. controls the fixed property of Matjies Ltd. indirectly.
•
In substance, the same occurred as when Keurboom Ltd. purchased the
fixed property directly. However, the financial statements do not reflect
the control that Keurboom Ltd. can exercise over the fixed property of
Matjies Ltd.
In this instance, the investment should not only be reflected as an investment
at cost price in the statement of financial position of Keurboom Ltd., somehow
the users of the financial statements must be able to see that Keurboom Ltd.
(the investor) owns and controls Matjies Ltd. (the investee), and the fixed
property therein.
This control is shown to the investor by means of the preparation of
consolidated financial statements.
The necessity that a transaction - as shown above, must comply with the
principles of fair presentation, is also entrenched in legislation. The Companies
Act No 71 of 2008, requires that consolidated financial statements, consisting
of a consolidated statement of financial position, statement of comprehensive
income, statement of changes in equity and statement of cash flows must be
prepared. In this chapter only the consolidated statement of financial position,
statement of comprehensive income and statement of changes in equity is
discussed.
2 -5
The consolidated statements are prepared as if they are the financial
statements of one company. The separate financial statements of the
holding company are presented to the users together with the
consolidated statements.
The consolidated statement of financial position of Keurboom Ltd. and
its subsidiary will look as follows:
Assets
Non-current assets
Fixed property
Current assets
Bank
R
25 000
15 000
40 000
Equity and liabilities
Equity attributable to owners of the holding company
Ordinary share capital
Retained earnings
10 000
30 000
40 000
If you compare this consolidated statement of financial position to the
statement of financial position of Keurboom Ltd. when it purchased the fixed
property directly and not through its shareholding in Matjies Ltd., the
statements of financial position are exactly the same.
2.5
ACCOUNTING TREATMENT OF SIGNIFICANT INVESTMENTS
The manner in which an investment is treated in the financial statements of the
investor depends on the degree of control that the investor has.
In FA288 we only look at the situation where one company controls another
(holder and subsidiary) and the accounting treatment that will be applied is
consolidation.
2.6
WHEN DOES CONTROL EXIST? (IFRS 10)
Control is presumed to exist when the investor has
•
Power over the investee;
•
Exposure, or rights, to variable returns from its involvement with the
investee;
•
The ability to use its power over the investee to affect the amount of the
investor’s returns.
2 -6
Control is therefore not determined only by the percentage of the shareholding.
For purposes of FA288 you may assume that a shareholding of more than 50%
implies control.
The Companies Act extends the above-mentioned definition of control to
include the holding company / subsidiary relationship, under the following
circumstances:
A company is also a subsidiary of the holding company, if …
1.
It is a subsidiary of a company that is a subsidiary of the holding
company:
Illustration:
C Ltd.
B Ltd.
A Ltd.
A Ltd. is a subsidiary of B Ltd. and B Ltd. is a subsidiary of C Ltd. A Ltd. is
therefore also a subsidiary of C Ltd.
or
2.
It is jointly controlled by subsidiaries of the holding company:
Illustration:
E Ltd.
B Ltd.
C Ltd.
D Ltd.
A Ltd.
B Ltd., C Ltd. and D Ltd. are subsidiaries of E Ltd.
A Ltd. is a joint subsidiary of B Ltd., C Ltd. and D Ltd.
A Ltd. is therefore also a subsidiary of E Ltd.
The above-mentioned definition stresses the fact that the holding company /
subsidiary relationship is based on one or another form of control by the
holding company over the subsidiary, rather than that of direct shareholding,
voting rights or the composition of the board of directors. It is not necessary
to own all the issued shares of a company in order to control that company.
NOTE: CONSOLIDATED FINANCIAL STATEMENTS MUST INCLUDE ALL
THE SUBSIDIARIES OF THE HOLDING COMPANY
2 -7
2.7
CONSOLIDATION PROCEDURES
•
When consolidated financial statements are prepared, the separate
financial statements of the holding company and the subsidiary
companies are combined.
•
This is done by adding each line item together for example assets such
as motor vehicles, liabilities such as long-term loans, income and
expenses.
•
The financial statements of the holding company and its subsidiaries
used in the preparation of the consolidated financial statements must
preferably have the same reporting date. If it is different it may not
differ more than three months, and adjustments should be made for
material transactions in this period.
•
Consolidated financial statements must be prepared according to
uniform accounting policies for the same transactions and
circumstances.
The following steps should be taken to ensure that the consolidated financial
statements disclose the financial information of the group as that of a single
economic entity:
1.
2.
3.
Elimination of intercompany balances
Elimination of intercompany transactions
Combination of remaining items
Consolidation is a process that should be repeated from the start every year.
No consolidated financial information is kept during the year. The holding
company and subsidiary records its own financial information separately
during the year. Each year the consolidation is then done from scratch using
the separate financial statements of the holding company and subsidiary.
There are three possible situations that can arise when the holding company
acquires shares in a subsidiary:
1. The shares are acquired at a price equal to the fair value of the net assets
of the subsidiary.
2. The shares are acquired at a premium, i.e. a price higher than the fair
value of the net assets of the subsidiary.
3. The shares are acquired at a discount, i.e. a price lower than the fair
value of the net assets of the subsidiary. (FA 389)
2 -8
2.8
WHOLLY-OWNED SUBSIDIARIES: CONSOLIDATION ON DATE OF
ACQUISITION
Example 1: Interest acquired at fair value of net assets
The following are the condensed statements of financial position of H Ltd. and
S Ltd. at 31 December 2011. H Ltd. acquired all the issued shares in S Ltd. at
a cost price of R178 000 on this date.
H Ltd.
S Ltd.
ASSETS
Property
Investment in S Ltd.
Trade debtors
Total assets
182 000
178 000
96 000
456 000
130 000
88 000
218 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Trade creditors
Total equity and liabilities
400 000
16 000
40 000
456 000
160 000
18 000
40 000
218 000
Assume that the identifiable assets acquired and the liabilities assumed
on the date of acquisition are shown at their fair values on that date.
(For example: Property of S Ltd.’s market value/fair value is R130 000).
Basic consolidation procedures:
1. Eliminating intercompany balances
The corresponding intercompany balances are the investment in
subsidiary in H Ltd.’s records and the equity (share capital and retained
earnings) in S Ltd.’s records, owned by H Ltd. The equity of S Ltd.
represents the fair value of the assets less liabilities, and is effectively
what H Ltd. purchased when it acquired the shares forR178 000.
2. Eliminating intercompany transactions
None
3. Combination of remaining items
The remaining items are added on a line-by-line basis and shown in the
consolidated statements on this basis, e.g. property will be shown at
R312 000(182 000 + 130 000).
2 -9
An analysis of shareholder’s equity of the subsidiary is used in order to
facilitate the consolidation process.
On date of acquisition (31/12/2011)
Ordinary share capital
Retained earnings
Difference
Cost price of investment
Total
H Ltd. 100%
At
Since
160 000
18 000
178 000
178 000
160 000
18 000
178 000
178 000
It is clear from the analysis that there is no difference between the fair values of
the net assets (equity) of S Ltd. and the cost price of the investment.
1.
Eliminating intercompany balances
The following consolidation journal entry is needed:
Ordinary share capital
Retained earnings
Investment in S Ltd.
Eliminating equity of S Ltd. against the investment
Debit
160 000
18 000
Credit
178 000
Consolidation journals are processed to compile the consolidated
financial statements. Consolidation journals are not permanent in nature
and have no effect on the companies’ separate statements.
3.
Combination of remaining items
ASSETS
Property
Investment in S Ltd.
Trade debtors
Total assets
EQUITY AND
LIABILITIES
Ordinary share capital
Retained earnings
Trade creditors
Total equity and
liabilities
H Ltd.
S Ltd.
182 000
178 000
96 000
456 000
130 000
88 000
218 000
400 000
16 000
40 000
160 000
18 000
40 000
160 000
18 000
456 000
218 000
178 000
2 - 10
Consolidation
journals
Dr
Cr
178 000
Consolidated
312 000
184 000
496 000
400 000
16 000
80 000
178 000
496 000
2.9
GOODWILL
In the example above the holding company acquired the shares in the subsidiary
at a price equal to the fair value of the net assets as it appears in the accounting
records of the subsidiary.
In practice, however, it often happens that shares are acquired at a premium, in
other words, a price higher than the fair value of the net assets of the subsidiary
(paid for potential earnings).The surplus of the cost price exceeding the fair
value of the net assets is called goodwill.
IFRS 3 describes goodwill as an asset which represents future economic
benefits, which arose from other assets acquired from a business combination
and which cannot be individually identified or recognised separately.
The buyer must therefore first attempt to allocate the surplus of the cost of
acquisition exceeding net assets to individual assets (which has not been
reflected at fair value in the subsidiary’s financial statements) and the part which
cannot be allocated to individual assets, must be recognised as goodwill.
Goodwill is recognised on the consolidated financial statements as an asset at
cost price (surplus of purchase price less fair value of net assets) less any
impairment losses according to IAS36- Impairment of assets. IAS 36 is part of
FA389’s curriculum.
Goodwill is not amortised. It is only tested for impairment on an annual basis
and in terms of IAS 36 (not addressed in FA288).
Example 2: Interest acquired at a premium above fair value of net assets
The following are the condensed statements of financial position of H Ltd. and
S Ltd. at 31 December 2011. H Ltd. acquired all the issued shares in S Ltd. at
a cost price of R193 000 on this date.
H Ltd.
S Ltd.
ASSETS
Property
182 000
130 000
Investment in S Ltd.
193 000
Trade debtors
96 000
88 000
Total assets
471 000
218 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Trade creditors
Total equity and liabilities
400 000
31 000
40 000
471 000
160 000
18 000
40 000
218 000
($)Assume that the identifiable assets acquired and the liabilities assumed
on the date of acquisition are shown at their fair values on that date.
2 - 11
An analysis of shareholder’s equity of the subsidiary is used in order to
facilitate the consolidation process.
H Ltd. 100%
At
Since
Total
Date of acquisition (31/12/2011)
Ordinary share capital
Retained earnings
160 000
18 000
178 000
15 000
193 000
Difference
Cost price of investment
160 000
18 000
178 000
15 000
193 000
It is clear from the analysis that there is a R15 000 difference between the fair
value of the net assets of S Ltd. and the price that H Ltd. paid for these assets.
H Ltd. must now determine whether the R15 000 should be allocated to the
assets acquired, before it is classified as goodwill.
The assets in S Ltd.’s records were already stated at fair value ($) and there are
no other assets of S Ltd. which have not been recognised. Therefore
H Ltd. paid the R15 000 extra for an asset which cannot be identified
individually. It is then recognised as goodwill.
1. Eliminating intercompany balances
The following consolidation journal entry is needed:
Debit
Ordinary share capital
160 000
Retained earnings
18 000
Goodwill
15 000
Investment in S Ltd.
Eliminating equity of S Ltd. against the investment
Credit
193 000
3. Combination of remaining items
ASSETS
Property
Investment in S Ltd.
Goodwill
Trade debtors
Total assets
EQUITY AND
LIABILITIES
Ordinary share capital
Retained earnings
Trade creditors
Total equity and
liabilities
H Ltd.
S Ltd.
Consolidation
journals
Dr
Cr
182 000
193 000
130 000
-
96 000
471 000
88 000
218 000
400 000
31 000
40 000
160 000
18 000
40 000
160 000
18 000
471 000
218 000
193 000
193 000
15 000
2 - 12
Cons.
312 000
15 000
184 000
511 000
400 000
31 000
80 000
193 000
511 000
CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF H LTD.
AT 31 DECEMBER 2011
ASSETS
Non-current assets
Property (182 000+ 130 000)
**Investment in S Ltd.(193 000 – 193 000cr)
Goodwill (15 000 dr)
Current assets
Trade debtors (96 000 + 88 000)
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital (400 000 + 160 000 – 160 000 dr)
Retained earnings (31 000 + 18 000 – 18 000 dr)
Total equity
Current liabilities
Trade creditors (40 000 + 40 000)
Total equity and liabilities
R
312 000
15 000
327 000
184 000
511 000
400 000
31 000
431 000
80 000
511 000
** This line is not shown in the consolidated statements.
2.10
WHOLLY-OWNED SUBSIDIARIES:CONSOLIDATION AFTER DATE OF
ACQUISITION
When consolidation of a subsidiary takes place after the date of acquisition of
control, it follows that the statements of comprehensive income and statements
of change in equity must also be consolidated.
The profit earned by the subsidiary before the acquisition is deemed as
“purchased profit” and forms part of the equity (retained earnings) that is
eliminated on the date of acquisition.
The profit of the subsidiary, which arises after acquisition by the holder, is
distributable profit from the group’s point of view. It must therefore be shown as
part of the group’s profit in the consolidated statement of comprehensive
income.
The consolidated statement of comprehensive income and statement of
changes in equity will therefore include the following:
•
•
All the appropriate debit and credit items in the SCI and SCE of the
subsidiary applicable to the period after acquisition.
The corresponding items in the SCI and SCE of the holding company.
2 - 13
The same consolidation procedures are still followed:
1. Eliminating intercompany balances
2. Eliminating intercompany transactions
3. Combination of remaining items
Example 3: Interest acquired at fair value of net assets
The following are the condensed statements of financial position of H Ltd. and
S Ltd. on 31 December 2011. H Ltd. acquired all the issued shares in S Ltd. at
a cost price of R44 000 on 31 December 2010. At that stage the balance of
S Ltd.’s retained earnings account was R4 000 (credit). There have been no
changes in the share capital of S Ltd. since 31 December 2010.
Statements of financial position as at 31 December 2011
H Ltd.
S Ltd.
ASSETS
Equipment
Investment in S Ltd.
Trade debtors
Total assets
10 000
44 000
66 000
120 000
40 000
30 000
70 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Trade creditors
Total equity and liabilities
50 000
7 500
62 500
120 000
40 000
7 500
22 500
70 000
Assume that the identifiable assets acquired and the liabilities assumed on the
date of acquisition are shown at their fair values on that date.
Statements of comprehensive income for the year ended
31 December 2011
Income
Cost of sales
Gross profit
Other income
Profit before tax
Income tax expense
Profit for the year
2 - 14
H Ltd.
S Ltd.
18 000
(11 500)
6 500
2 000
8 500
(2 000)
6 500
15 000
(10 000)
5 000
5 000
(1 500)
3 500
Extract from the statements of changes in equity for the year ended
31 December 2011
Retained earnings
H Ltd.
S Ltd.
Balance on 1 January 2011
Profit for the year
Ordinary dividend
Balance on 31 December 2011
3 500
6 500
(2 500)
7 500
4 000
3 500
7 500
Analysis of shareholder’s equity
H Ltd. 100%
At
Since
Total
Date of acquisition (31/12/2010)
Ordinary share capital
Retained earnings
Difference
Cost price of investment
40 000
4 000
44 000
44 000
Since acquisition
Till beginning of current year
Current year
Profit for the year (SCI)
Total equity on 31 December 2011
40 000
4 000
44 000
44 000
-
-
3 500
47 500
3 500
3 500
44 000
1. Eliminating intercompany balances
The initial investment is eliminated as at acquisition:
Ordinary share capital
Retained earnings
Investment in S Ltd.
Eliminating equity of S Ltd. against the investment
2. Eliminating intercompany transactions
None
3. Combination of remaining items
2 - 15
Debit
40 000
4 000
Credit
44 000
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME OF H LTD.
FOR THE YEAR ENDED 31 DECEMBER 2011
Income (18 000 + 15 000)
Cost of sales (11500 + 10 000)
Gross profit
Other income
Profit before tax
Income tax expense (2 000+ 1 500)
Profit for the year
33 000
(21 500)
11 500
2 000
13 500
(3 500)
10 000
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF H LTD.
FOR THE YEAR ENDED 31 DECEMBER 2011
Balance on 1 January 2011 (3 500 + 4 000 -4 000 dr)
Profit for the year (from SCI)
Ordinary dividend
Balance on 31 December 2011
Retained
earnings
3 500
10 000
(2 500)
11 000
CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF H LTD.
AT 31 DECEMBER 2011
ASSETS
Non-current assets
Equipment (10 000 + 40 000)
**Investment in S Ltd.(44 000 - 44 000 cr)
Current assets
Trade debtors (66 000 + 30 000)
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital (50 000 + 40 000 – 40 000 dr)
Retained earnings (from SCE)
Total equity
Current liabilities
Trade creditors (62 500 + 22 500)
Total equity and liabilities
** This line is not shown in the consolidated statements.
2 - 16
50 000
96 000
146 000
50 000
11 000
61 000
85 000
146 000
2.11
WHOLLY-OWNED SUBSIDIARIES: INTERCOMPANY TRANSACTIONS
Introduction
A variety of intercompany transactions can occur between companies within
the same group. Some examples of these transactions are the following:
•
•
•
•
•
Debtors / Creditors / Loan accounts / Debentures
Interest paid / received
Dividends paid / received
Intercompany sale of inventory
Intercompany sale of property, plant and equipment
The implications of the abovementioned examples will be discussed in depth
below.
2.11.1 Debtors / Creditors / Loan accounts / Debentures
When there is intercompany trading between companies, other than on a cash
basis, there could be a debtors’ account or loan account (assets) within one
company in the group, with the corresponding creditors’ account or loan
account (liability) within another company in the same group. It can, however,
also be that there are no transactions between the companies but the one
company for example had a debenture issue and the other made an
investment in those debentures.
When the two companies concerned within the group prepare their own
financial statements, these intercompany assets and liabilities do not create
any conflicts. The conflict arises when consolidated financial statements are
prepared and are treated as the financial statements of a single company.
Then the same company cannot be indebted to itself, in other words, in respect
of the same transaction a company cannot be a debtor and a creditor in the
same set of financial statements.
Therefore, to eliminate this intercompany transaction when the consolidated
financial statements are prepared, the following entry must be processed:
Dr
Creditors / Loan account (liability) / Debentures (liability)
Cr
Debtors / Loan account (asset) / Debentures (asset)
Sometimes these instruments can also be interest-bearing and then the
corresponding intercompany interest must also be eliminated. It will be an
income for one company and an expense for the other company in the group,
but there should actually not be any transaction in the consolidated
statements. When the interest line items are added on consolidation, there will
consequently be an interest income and expense for the same amount. The
entry to eliminate the intercompany interest on consolidation will then be as
follows:
2 - 17
Dr
Interest income
Cr Interest expense
Illustration:
HOLDING COMPANY PURCHASED DEBENTURES IN A SUBSIDIARY
The holding company purchased R10 000 debentures in the subsidiary.
Interest on these debentures amounted to R1 000 per annum.
Financial statements of
holder
Financial statements
of subsidiary
Consolidated statements
no debentures, thus no
interest
SFP
Asset:
Investment in
debentures: R10 000
SFP
Liabilities:
Debentures: R10 000
Cons. SFP
-
SCI
SCI
Cons. SCI
Interest income: R 1 000 Interest expense:R1 000 -
The following consolidation journal must be processed:
Debentures (liability)
Investment in debentures (asset)
Elimination of intercompany debentures
Interest income
Interest expense
Elimination of intercompany interest
Debit
10 000
Credit
10 000
1 000
1 000
2.11.2 Dividends paid or received
When dividends are paid by the subsidiary, the holding company receives its
portion of the dividends, in respect of the shares owned by the holding
company. This intercompany transaction must be eliminated.
2 - 18
Illustration:
The holding company owns 100% of the shares of the subsidiary.
subsidiary declared and paid dividends of R10 000 during the year.
The
An extract from the financial statements of the holder and subsidiary are as
follows:
Holder
Subsidiary
Statement of comprehensive income
Dividend income
10 000
Statement of changes in equity
Dividend declared
10 000
The holding company owns 100% of the shares of the subsidiary, therefore,
dividends amounting to R10 000 were paid to the holder. To eliminate this
intercompany transaction on consolidation the following journal entry must be
recorded:
Debit
Credit
Dividend income
10 000
Dividend declared
10 000
Elimination of intercompany dividends
2.11.3 Intercompany inventory sales
Investments in companies are often made for strategic reasons for example to
promote trade. If company A for example produces a certain product and
company B supplies the material necessary for producing the product, it can
be to the advantage of company A to acquire a controlling interest in company
B, to ensure the continuing supply of the material. The connection will also be
to the advantage of company B since there is a continuing market for its
material.
A: No closing inventory with purchaser
S Ltd. is a wholly-owned subsidiary of H Ltd. S Ltd. sells inventory to H Ltd.,
who then sells to the public. H Ltd. has no closing inventory at year end.
As soon as S Ltd. sells their products to H Ltd. a profit realises in its books,
e.g.
R
Revenue (sale to H Ltd.)
10 000
Cost of sales
7 500
Gross profit
2 500
The cost price of the inventory for H Ltd. is therefore R10 000. If H Ltd. sells
the relevant inventory before the reporting date, it also realises a profit, e.g.
R
12 500
10 000
2 500
Revenue (sale to public)
Cost of sales
Gross profit
2 - 19
The group will therefore realise a profit of R5 000, which will be shown as such
in the consolidated statement of comprehensive income.
If the line items are added on consolidation, it will be as follows:
R
22 500
17 500
5 000
Revenue (10 + 12.5)
Cost of sales (7.5 + 10)
Gross profit (2.5 + 2.5)
The profit for the group is correct, but the revenue and cost of sales are
overstated. If the two companies are seen as one, it means that the inventory
was purchased by the group at an amount of R7 500 (by S Ltd.) and sold from
the group at an amount of R12 500 (by H Ltd.) which then led to the group
profit of R5 000. The transaction between H Ltd. and S Ltd. must be ignored
from a group point of view.
The intercompany sales of inventory can be eliminated on consolidation by
the following journal:
Debit
Credit
Revenue (S Ltd.)
10 000
Cost of sales (H Ltd.)
10 000
The effect of this journal on the consolidated figures are as follows:
R
12 500
7 500
5 000
Revenue (10+ 12.5 - 10)
Cost of sales (7.5+ 10 - 10)
Gross profit (2.5 + 2.5)
Although the abovementioned entry will have no influence on the consolidated
profit, it is necessary for the correct accounting treatment of the consolidated
revenue and cost of sales, which display the group’s transactions with outside
parties.
The consolidation can be summarised as follows:
Year 1
SCI (cr = +)
Revenue
Cost of sales
Gross profit
H Ltd.
S Ltd.
Debit
12 500
(10 000)
2 500
10 000
(7 500)
2 500
(10 000)
Credit
10 000
Group
12 500
(7 500)
5 000
B: The purchaser has closing inventory
The situation will however change if H Ltd. does not sell all the inventory
before the reporting date. The following conflicts will arise when the
consolidated statements are compiled:
2 - 20
• The group effectively sold inventory to itself and the profit of R2 500 (in
S Ltd.’s books) is therefore not a realised profit. This profit only realises
when the inventory is sold to parties outside the group. It will however
be recorded in the consolidated statements when the revenue and cost
of sales line items are added to H Ltd.’s.
• Inventory is valued in the statement of financial position at the lesser of
cost price or net realisable value. Showing the inventory at R10 000
(cost price in H Ltd.’s records) in the consolidated statement of financial
position, is therefore not in accordance with the requirements of IFRS.
The actual cost price of the inventory for the group was R7 500.
Please note:
In the individual financial statements of H Ltd. and S Ltd. it would have
made no difference to the profit or the carrying amount of the inventory
on reporting date whether H Ltd. sold the inventory to a third party or it
was still in its possession.
The intercompany sales of inventory (where there is closing inventory) must
be eliminated on consolidation as follows:
To correct the sales and cost of sales figure:
Debit
10 000
Revenue (S Ltd.)
Cost of sales (H Ltd.)
Credit
10 000
To correct the profit and the closing inventory:
Debit
2 500
Cost of sales (S Ltd.)
Inventory (H Ltd.)
Credit
2 500
The inventory’s cost price is decreased to R7 500 (as paid by S Ltd.) and since
cost of sales increases, it decreases the profit of the group. The adjustment is
made to cost of sales since no entry can be made directly against gross profit.
(It is merely a disclosure line on SCI.)
Tax impact on the abovementioned:
•
•
•
•
•
•
Assume the tax rate is 27%.
S Ltd. paid tax on the profit from inventory sales to H Ltd. Each company
within the group is a separate legal tax entity and will have to settle its
respective liabilities with SARS.
The payment of the tax by S Ltd. is valid, as the profit was a realised profit
from only S Ltd.’s point of view.
The group, however, is not a tax entity.
From the group’s point of view, the profit on sale of the inventory was an
unrealised profit which must be eliminated from the consolidated
statements.
The tax paid by S Ltd. must therefore also be eliminated on consolidation.
If it is not eliminated, the group financial statements will have a tax expense
2 - 21
•
•
•
with no corresponding profit. (Similar to the interest principle on loans /
debentures).
The carrying amount of the asset (inventory) is also changed in the group’s
consolidated financial statements, without a corresponding adjustment to
the tax base (which remains the same as for the 2 sets of individual
financial statements of S Ltd. and H Ltd.).
If we consider the deferred tax table from the group’s perspective, the
following would have happened: Initially the CA and the TB of the inventory
would be equal, leading to no temporary difference and no deferred tax
consequences. However, in the group statements, the CA of the inventory
is reduced by the amount of unrealised profit leading to a carrying amount
that is < the tax base. This gives rise to a deductible temporary difference
(from the group’s perspective).
Looking at the deferred tax from another angle: from the group’s
perspective the tax S Ltd. paid is effectively an advance payment for the
profit which will realise in the group during the next year. It will therefore
lead to a tax benefit in the future, which is represented by the deferred tax
asset (debit).
The following journal entry is needed to record the tax effect on the elimination
of the intercompany profit on consolidation:
Debit
Credit
Deferred tax (SFP)
675
Income tax expense (SCI)
675
(2 500 unrealised profit x 27%)
REMEMBER: IF UNREALISED PROFIT IS ELIMINATED, THE PROFIT
OF THE GROUP DECREASES AND IF PROFIT DECREASES, TAX
SHOULD ALSO DECREASE.
2 - 22
The consolidation can be summarised as follows:
Year 1
SCI (cr = +)
Revenue
Cost of sales
Gross profit
Tax
SFP (dr = +)
Inventory
Deferred tax
H Ltd.
S Ltd.
Debit
Credit
10 000
(7 500)
2 500
(675)
(10 000)
(2 500)
10 000
Group
-
675
10 000
(2 500)
675
7 500
675
C: The purchaser has opening inventory that was purchased internally
during the previous year
It is important to remember that the abovementioned journal entries are only
made for the purposes of the consolidated financial statements and that the
individual companies in the group will not process these journals for the
elimination of intercompany transactions in their own financial statements.
Consolidated statements are, however, compiled from the separate financial
statements of the companies in the group and if there was an adjustment for the
unrealised profits with consolidation at the end of Year 1, a correction must be
made at the start of Year 2 in order to ensure that the consolidated profit (which
is now in retained earnings) at the start of Year 2 corresponds with the
consolidated profit at the end of Year 1.
ASSUMPTION: In consolidations we assume that the opening inventory will be
sold to the public during the year (FIFO).The unrealised profit on last year's
closing inventory is therefore realised in the current year.
YEAR 1
Unrealised profit in
closing inventory
Remove from current
year’s profit (SCI)
YEAR 2
Unrealised profit in
opening inventory
Take from previous year’s
profit, thus retained
earnings (SCE)
Realise in current
year’s profit (SCI)
Assume the scenario at B occurs at the end of Year 1. The R2 500 profit is
therefore eliminated and the inventory decreases at consolidation at the end of
Year 1. The individual statements of H Ltd. and S Ltd. however remain
unchanged and the profit in S Ltd.’s records will close off to retained earnings.
The inventory in H Ltd.’s records will become opening inventory in year 2 and
will then be sold with a cost of sales of R10 000.
2 - 23
Below are the individual statements before consolidation:
Year 2
H Ltd.
SCI (cr = +)
Revenue
12 500
Cost of sales
(10 000)
Gross profit
2 500
Tax
(675)
SFP (dr = +)
Inventory
Retained earnings (opening balance)
S Ltd.
(1 825)
For the group this sales transaction now realised by H Ltd. selling the inventory
to an outside party. The group statements now need to show the profit of R5 000
(and the tax on it at 27%). The revenue for the group must be R12 500 and the
cost of sales must be R7 500 (see example A).
In order to achieve this, the following consolidation journal entry is needed:
Debit
1 825
675
Retained earnings (no group profit in Year 1)
Income tax expense
Credit
(increase profit in Year 2, therefore increase tax)
Cost of sales
2 500
(profit previously removed now realises, therefore group profit increases)
Year 2
SCI (cr = +)
Revenue
Cost of sales
Gross profit
Tax
SFP (dr = +)
Inventory
Retained earnings
H Ltd.
S Ltd.
12 500
(10 000)
2 500
(675)
Debit
Credit
(675)
12 500
(7 500)
5 000
(1 350)
1 825
-
2 500
(1 825)
Group
2.11.4 Intercompany sales of property, plant and equipment
Occasionally property, plant and equipment, as with inventory, is sold between
companies in a group. As long as there is no underlying profit-taking involved,
no further conflicts arise. From the point of view of the individual companies the
profit, as with inventory, does realise but as soon as consolidation takes place
a company cannot sell property, plant and equipment (seen from the point of
view of the statements of a single company) to itself.
2 - 24
Illustration:
Year 1
H Ltd. owns 100% of the issued ordinary shares of S Ltd. On the first day of
year 1 S Ltd. sold equipment, manufactured by itself at a cost price of R30 000,
to H Ltd. for an amount of R42 000. The tax rate is 27%.Depreciation in the
group is provided at 50% (straight-line) per annum on the cost price. The
remaining life of the equipment on the date of the transaction is two years.
S Ltd. will realise a profit of R12 000 on the date of sale. From the group’s
perceptive, however, it is an unrealised profit. The equipment is also now
recorded at a cost price of R42 000 in H Ltd.’s records, while the group actually
manufactured the equipment at a cost of R30 000 (by S Ltd.). The following
eliminations on year-end must therefore be made before consolidated
statements can be compiled.
Debit
12 000
Profit with sale of assets
Equipment
Credit
12 000
Deferred tax (SFP)
Income tax expense (12 000 x 27%)
3 240
3 240
The carrying amount of the asset (equipment) is reduced in the group’s
statements without an adjustment to the tax base (which remains the same as
the 2 individual statements). Therefore, when the deferred tax table of the group
is drawn, the carrying amount is smaller than the tax base and a deductible
temporary difference arises (from the group’s point of view). Therefore the
deferred tax is an asset in the SFP. The income tax expense is decreased since
the group’s profit decreases.
This transaction is complicated even further as H Ltd. will provide depreciation
on R42 000 in their individual financial statements, therefore R21 000 per
annum. From a group point of view the cost price of the equipment is only
R30 000 and the annual provision for depreciation should only be R15 000.
Before consolidated statements can be compiled, this ‘excessive’ depreciation
must first be eliminated as follows:
Debit
Credit
Accumulated depreciation
6 000
Depreciation
6 000
Income tax expense
Deferred tax (SFP)
1 620
1 620
2 - 25
Year 1-end
SCI (cr = +)
Profit wso asset
Depreciation
Tax
SFP (dr = +)
Equipment- CP
Equipment- AD
Deferred tax
H Ltd.
S Ltd.
Debit
Credit
Group
6 000
3 240
(15 000)
4 050
12 000 (12 000)
(21 000)
5 670
(3 240)
42 000
(21 000)
(1 620)
(12 000)
6 000
3 240
(1 620)
30 000
(15 000)
1 620
Please note:
The initial unrealised profit of R12 000 will realise over a period of
2 years in the consolidated statements as the depreciation is decreased by
R6 000, and the profit therefore increased by R6 000 each year.
Concurrently the initial deferred tax asset of R3 240 will also decrease with an
amount of R1 620 every year as it is allocated to the income tax expense. This
corresponds with the profit that realises over the 2 year term in the group
financial statements. The deferred tax asset as well as the effect of the
unrealised profit will therefore both be eliminated by the end of the 2 years.
Year 2 - opening balances
The individual statements must be consolidated again at the end of year 2. Once
again the abovementioned adjustments were NOT made in the individual
statements and year 2’s individual statements will not reflect these adjustments.
When year 2’s line items are therefore added, the abovementioned adjustments
must be made again so that year 2’s group statements’ opening balances
correspond to year 1’s group statements’ closing balances.
Year 1’s journals must therefore be repeated- but that which was in the SCI, is
now in retained earnings (profit, dep &tax).
Debit
Credit
Retained earnings (SCE)
8 760
Deferred tax (SFP)
3 240
Equipment
12 000
Accumulated depreciation
Retained earnings (SCE)
Deferred tax (SFP)
6 000
4 380
1 620
Adjustments to Year 2’s opening balances:
Year 2 - opening
H Ltd.
S Ltd.
Debit
Credit
Group
SFP (dr = +)
Equipment- CP
42 000
(12 000)
30 000
Equipment- OB
(21 000)
6 000
(15 000)
Retained earnings
15 330 (8 760)
8 760
(4 380)
10 950
Deferred tax
3 240
(1 620)
1 620
(Now compare the group figures with the group’s figures at the end of year 1)
2 - 26
Year 2- closing balances
H Ltd. will again provide depreciation based on a cost price of R42 000,
therefore R21 000 in their individual financial statements during year 2.
According to the group the cost price of the equipment is only R30 000 and the
annual depreciation should be R15 000.This ‘excessive’ depreciation for year 2
must therefore also be eliminated as follows (please note: the same journal as
year 1).
Debit
Credit
Accumulated depreciation
6 000
Depreciation
6 000
Income tax expense
Deferred tax (SFP)
Year 2-end
SCI (cr =+)
Depreciation
Tax
SFP (dr =+)
Equipment- CP
Equipment- OB
Retained earnings
Deferred tax
1 620
1 620
H Ltd.
S Ltd.
(21 000)
5 670
42 000
(42 000)
15 330
Debit
(1 620)
Credit
6 000 (15 000)
4 050
(12 000)
(8 760)
2 - 27
12 000
8 760
3 240
Group
30 000
(30 000)
(4 380)
10 950
(3 240)
-
2.12 SUBSIDIARIES:CONSOLIDATION ON DATE OF ACQUISITION
When the holding company does not acquire all the issued share capital
(therefore not 100%) of a subsidiary, but still has control over the company
(assume > 50%), it is not a wholly-owned subsidiary, but it is still a subsidiary.
The other shareholders (other than the holding company) are called the minority
shareholders. During consolidation the minority shareholders’ interest must be
considered. These shareholders’ interest in the subsidiary’s net assets and
profit/losses is presented as non-controlling interest in the consolidated
statements.
Illustration:
Holding company
Minority shareholders
Do not have control, but own
some shares
Has control, but does not
own all the issued shares
Subsidiary
An analysis of shareholder’s equity is compiled in order to assist in the
calculation of the value of non-controlling interest, which will consist of:
•
•
an interest in at-acquisition equity (net assets not acquired by holder)
an interest in after-acquisition profit/loss (represented by a change in net
assets).
Example 4: Controlling interest acquired at a premium above fair value of
net assets
The following are the condensed statements of financial position of H Ltd. and
S Ltd. at 31 December 2011. H Ltd. acquired 70% of the issued shares in
S Ltd. at a cost price of R135 000 on this date.
H Ltd.
S Ltd.
ASSETS
Property
182 000
130 000
Investment in S Ltd.
135 000
Trade debtors
96 000
88 000
Total assets
413 000
218 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Trade creditors
Total equity and liabilities
340 000
31 000
42 000
413 000
160 000
18 000
40 000
218 000
($)Assume that the identifiable assets acquired and the liabilities assumed
on the date of acquisition are shown at their fair values on that date.
2 - 28
An analysis of shareholder’s equity of the subsidiary is used to facilitate the
consolidation process.
Total
Date of acquisition (31/12/11)
Ordinary share capital
Retained earnings
Difference
Cost price of investment
160 000
18 000
178 000
10 400
188 400
H Ltd. 70%
At
Since
112 000
12 600
124 600
10 400
135 000
NCI
48 000
5 400
53 400
53 400
The goodwill of R10 400 only relates to H Ltd.’s interest. This method to
calculate goodwill is called the acquisition method. An alternative method is
covered in FA389.
1. Eliminating intercompany balances
The following consolidation journal entry is needed:
Ordinary share capital
Retained earnings
Goodwill
Investment in S Ltd.
Non-controlling interest (SFP)
Eliminating equity of S Ltd. against the investment
Debit
160 000
18 000
10 400
Credit
135 000
53 400
CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF H LTD.
AT 31 DECEMBER 2011
ASSETS
Non-current assets
Property (182 000+ 130 000)
**Investment in S Ltd.(135 000- 135 000 cr)
Goodwill (10 400 dr)
Current assets
Trade debtors (96 000 + 88 000)
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital (340 000 + 160 000 – 160 000 dr)
Retained earnings (31 000 + 18 000 -18 000 dr)
Non-controlling interest (53 400 cr)
Total equity
Current liabilities
Trade creditors (42 000 + 40 000)
Total equity and liabilities
** This line is not shown in the consolidated statements.
2 - 29
R
312 000
10 400
322 400
184 000
506 400
340 000
31 000
371 000
53 400
424 400
82 000
506 400
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF H LTD.
FOR THE YEAR ENDED 31 DECEMBER 2011
Balance on 1/1/11
Acquisition of subsidiary
Profit for the year
Ordinary dividend
Balance on 31/12/11
Ordinary
share
capital
340 000
340 000
Retained
earnings
10 000*
25 000*
(4 000)*
31 000
NCI
Total
equity
53 400
-#
350 000
53 400
25 000
(4 000)
424 400
-
53 400
* Figures only for illustration – not given in example.
# NCI does not share in profit as shares was acquired at year-end.
2.13 SUBSIDIARIES: CONSOLIDATION AFTER DATE OF ACQUISITION
During consolidation the minority shareholders’ interest must be taken into
account. They have an initial interest in the equity at acquisition, as well as a
share of the profit since acquisition. The interest in the profit for the current year
is indicated in the consolidated statement of comprehensive income and the
total interest in the net assets is shown in the consolidated statement of financial
position. The consolidated statement of changes in equity shows the movement
in the non-controlling interest (SFP) for the year.
Example 5: Interest acquired at fair value of net assets
The following are the condensed statements of financial position of H Ltd. and
S Ltd. on 31 December 2011. H Ltd. acquired 80% of the issued shares in
S Ltd. at a cost price of R60 000 on 31 December 2008. At that stage the
balance of S Ltd.’s retained earnings account was R15 000 (credit). There have
been no changes in the share capital of S Ltd. since 31 December 2008.
Statements of financial position as at 31 December 2011
H Ltd.
S Ltd.
ASSETS
Equipment
Investment in S Ltd.
Trade debtors
Total assets
130 000
60 000
70 000
260 000
90 000
55 000
145 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Trade creditors
Total equity and liabilities
100 000
75 000
85 000
260 000
50 000
37 000
58 000
145 000
Assume that the identifiable assets acquired and the liabilities assumed on the
date of acquisition are shown at their fair values on that date.
2 - 30
Statements of comprehensive income for the year ended
31 December 2011
Revenue
Cost of sales
Gross profit
Dividend income from subsidiary
Profit before tax
Income tax expense
Profit for the year
H Ltd.
S Ltd.
39 000
(12 500)
26 500
4 000
30 500
(6 500)
24 000
42 500
(22 000)
20 500
20 500
(5 500)
15 000
Extract from the statements of change in equity for the year ended
31 December 2011
Retained earnings
H Ltd.
S Ltd.
Balance on 1 January 2011
Profit for the year
Ordinary dividend
Balance on 31 December 2011
60 500
24 000
(9 500)
75 000
27 000
15 000
(5 000)
37 000
Analysis of shareholder’s equity
On date of acquisition (31/12/08)
Ordinary share capital
Retained earnings
Goodwill
CP of investment & NCI (J1)
Since acquisition
Till beginning of current year
Retained earnings (27 – 15) (J2)
Current year
Profit for the year (SCI) (J3)
Ordinary dividend (SCE) (J4)
Total equity on 31/12/11
2 - 31
Total
H Ltd. 80%
At
Since
NCI
50 000
15 000
65 000
8 000
73 000
40 000
12 000
52 000
8 000
60 000
10 000
3 000
13 000
13 000
12 000
9 600
15 000
(5 000)
95 000
12 000
3 000
(4 000) (1 000)
17 600 17 400
60 000
2 400
1. Eliminating intercompany balances
J1
Ordinary share capital
Retained earnings
Goodwill
Investment in S Ltd.
Non-controlling interest (SFP)
Eliminating equity of S Ltd. against the investment
Debit
50 000
15 000
8 000
Credit
60 000
13 000
The minority shareholders are entitled to a share of the profit earned from the
date of acquisition to the beginning of the current year. This is accounted for by
recognising NCI out of the RE for this period. It is therefore all the profits
generated by the subsidiary after the holding company took control until the start
of the current year (27 000- 15 000).
J2
Debit
Retained earnings (opening balance) (12 000 x20%)
2 400
Non-controlling interest (SFP)
Recognition of NCI in RE of subsidiary for period 31/12/08-31/12/10
Credit
2 400
The current year’s profit is shown in the statement of comprehensive income
and the minority shareholders’ interest must therefore also be shown in the
statement of comprehensive income. The part allocated to the non-controlling
interest is effectively deducted from the total profit and the balance is then
attributable to the shareholders of the holding company.
J3
Non-controlling interest(SCI) (decreases H’s portion)
Non-controlling interest (SFP)
Recognition of NCI in profit for the year
Debit
3 000
Credit
3 000
2. Eliminating intercompany transactions
The dividend that was paid by the subsidiary must also be eliminated. The part
paid to H Ltd. is eliminated as it is an intercompany transaction. The NCI is
debited as the dividend paid out to them represents a decrease of their total
interest in S Ltd.
J4
Dividend income
Non-controlling interest (SFP)
Ordinary dividend (SCE)
Eliminating subsidiary’s dividend
2 - 32
Debit
4 000
1 000
Credit
5 000
3. Combination of remaining items
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME OF H LTD.
FOR THE YEAR ENDED 31 DECEMBER 2011
Revenue(39 000 + 42 500)
Cost of sales (12 500 + 22 000)
Gross profit
Dividend income (4 000 – 4 000 J4)
Profit before tax
Income tax expense (6 500 + 5 500)
Profit for the year
81 500
(34 500)
47 000
47 000
(12 000)
35 000
Total profit attributable to:
Owners of the holding company
Non-controlling interest J3
32 000
3 000
35 000
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY OF H LTD.
FOR THE YEAR ENDED 31 DECEMBER 2011
Balance on 1/1/11
Profit for the year
Ordinary dividend
Balance on 31/12/11
Ordinary
share
capital
100 0001
100 000
Retained
earnings
70 1002
32 000
(9 500)5
92 600
Total
170 100
32 000
(9 500)
192 600
NCI
Total
equity
15 4003 185 500
3 0004
35 000
6
(1 000) (10 500)
17 400 210 000
1100 000 + 50 000 – 50 000 J1
60 500 + 27 000 – 15 000 J1 – 2 400 J2
13 000 J1 + 2 400 J2
4 3 000 J3
5 9 500 + 5 000 – 5 000 J4
6 1 000 J4
2
3
CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF H LTD.AT
31 DECEMBER 2011
ASSETS
Non-current assets
Equipment (130 000 + 90 000)
Goodwill J1
Current assets
Trade debtors (70 000 + 55 000)
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital (from SCE)
Retained earnings (from SCE)
Non-controlling interest (from SCE)
Total equity
Current liabilities
Trade creditors (85 000 + 58 000)
Total equity and liabilities
2 - 33
R
220 000
8 000
228 000
125 000
353 000
100 000
92 600
192 600
17 400
210 000
143 000
353 000
2.14
SUBSIDIARIES: INTERCOMPANY TRANSACTIONS
2.14.1 Debtors/ Creditors/ Loan accounts/ Debentures
The purpose of the elimination of intercompany transactions and balances is
to ensure that the assets and liabilities (individual line items) are not incorrect
in the consolidated statements. The elimination of these corresponding items
has no effect on the net assets or the profit of the consolidated company and
therefore does not influence the non-controlling interest.
These intercompany transactions are eliminated on consolidation in the same
way as for a wholly-owned subsidiary.
Dr
Creditors/ Loan account (liability)/ Debentures (liability)
Cr Debtors/ Loan account (asset)/ Debenture (asset)
The entry to eliminate the intercompany interest also remains the same:
Dr
Interest income
Cr Interest expense
2.14.2 Dividends paid or received
When dividends are paid by the subsidiary, the holding company receives its
share of the dividend in respect of the shares owned by the holding company.
This is an intercompany transaction which must be eliminated.
Illustration:
Holding company owns 80% of subsidiary’s shares. Subsidiary declared and
paid R10 000 dividends during the year.
Below is an extract from the statements of the holder and subsidiary:
Holder
Statement of comprehensive income
Dividend income
Statement of changes in equity
Dividend declared
Subsidiary
8 000
10 000
The remaining R2 000 of the dividend was received by the non-controlling
interest. The following journal must be processed in order to eliminate this
intercompany transaction:
Debit
Credit
Dividend income
8 000
Non-controlling interest (SFP)
2 000
Ordinary dividend (SCE)
10 000
Eliminating intercompany dividends
2 - 34
2.14.3 Intercompany inventory sales
Intercompany sales must be eliminated in the same way as for a whollyowned subsidiary where minority shareholders are involved.
Use the following transaction as an example: S Ltd. sells inventory with a cost
price of R7 500 to H Ltd. for R10 000. H Ltd. sells the same inventory (cost
price therefore R10 000) to an outside party for R14 500. The total profit for
the group, if the transaction realises, is R7 000. H Ltd. owns 80% of the issued
shares of S Ltd.
A: No closing inventory with purchaser
Where no opening or closing inventory exists at year-end (sold between the
holder and its subsidiary), there are no adjustments to the consolidated profit.
There is then also no effect on the non-controlling interest. The revenue and
cost of sales figure must however still be adjusted so that it is not overstated
(with the inclusion of an intercompany transaction).
All intercompany sales for the year are eliminated as follows:
Debit
10 000
Revenue (S Ltd.)
Cost of sales (H Ltd.)
Credit
10 000
Although the abovementioned entry will have no influence on the consolidated
profit of the group, the correct accounting treatment of the consolidated
revenue and cost of sales, which reflect the group’s transactions with outside
parties, is necessary.
B: The purchaser has closing inventory
Assume all the inventory H Ltd. purchased from S Ltd. is still on hand at yearend. The unrealised profit included in the closing inventory must still be
eliminated as follows:
To adjust the sales and cost of sales figure:
Debit
10 000
Revenue (S Ltd.)
Cost of sales (H Ltd.)
Credit
10 000
To adjust the profit and the closing inventory:
Cost of sales (S Ltd.)(10 000 – 7 500)
Inventory (H Ltd.)
Debit
2 500
Credit
2 500
To adjust the tax expense on the profit:
Deferred tax (SFP) (2 500 x 27%)
Income tax expense (SCI)
2 - 35
Debit
675
Credit
675
The inventory’s cost price is decreased to R7 500 (as paid by S Ltd.)and since
cost of sales increases, it decreases the profit of the group. As the profit of the
group is decreased, the tax expense also decreases. The non-controlling
interest’s share of S Ltd.’s profit is calculated after S Ltd.’s profit is decreased
with the unrealised profit.
Analysis of shareholder’s equity (Assume S Ltd.’s profit in its individual
statements is R50 000)
Total
On date of acquisition
Ordinary share capital
xxx
xx
xx
Since acquisition
Till beginning of current year
Retained earnings
Current year – YEAR 1
Profit for the year (SCI)
Profit in closing inventory(2500–675)
Total equity
H Ltd. 80%
At
Since
xx
xx
0
48 175
50 000
(1 825)
xx
NCI
xx
xx
0
38 540
40 000
(1 460)
0
9 635
10 000
(365)
xx
xx
xx
In the analysis of shareholder’s equity S Ltd.’s profit is decreased by the
unrealised profit after tax (1 825). Only then is it apportioned between the
holder and the non-controlling interest. Effectively, the non-controlling
interest’s share of the subsidiary’s profit is also decreased with the unrealised
portion.
The current year’s profit is shown in the statement of comprehensive income
and the minority shareholders’ interest must therefore also be shown in the
statement of comprehensive income. The NCI (SCI) is debited as it is actually
a decrease of the total profit that goes to the holding company’s shareholders
(from whose perspective the group statements are drafted). The credit against
NCI (SFP) increases the NCI’s equity (share of the net assets which do not
belong to the holding company’s shareholders).
Debit
Non-controlling interest (SCI)
9 635
Non-controlling interest (SFP)
Recognition of NCI in profit for the year, after adjustment
for unrealised profit
Credit
9 635
C: The purchaser has opening inventory that was purchased internally
during the previous year
Consolidated statements are compiled from the separate financial statements
of the companies in the group and if there was an adjustment for the unrealised
profits with consolidation at the end of year 1, an adjustment must be made at
the start of year 2 in order to ensure that the consolidated profit (which is now
2 - 36
in retained earnings) at the start of year 2 corresponds with the consolidated
profit at the end of year 1.
ASSUMPTION: In consolidations we assume that the opening inventory will be
sold to the public during the year (FIFO).The unrealised profit on last year's
closing inventory is therefore realised in the current year.
YEAR 1
Unrealised profit in
closing inventory
Remove from current
year’s profit (SCI)
YEAR 2
Unrealised profit in
opening inventory
Take from previous year’s
profit, thus retained
earnings (SCE)
Realise in current
year’s profit (SCI)
Assume the scenario at B occurs at the end of year 1. The R2 500 profit is
therefore eliminated and the inventory decreased at consolidation at the end of
year 1. The individual statements of H Ltd. and S Ltd. however remain
unchanged and the profit in S Ltd.’s records will close off to retained earnings.
The inventory in H Ltd.’s records will become opening inventory in year 2 and
will then be sold, with a cost of sales of R10 000. The individual statements do
not take the effect of NCI into consideration at all- as it only arises at
consolidation.
Below are extracts from the individual statements before consolidation:
Year 2
H Ltd.
S Ltd.
SCI (cr=+)
Revenue
14 500
Cost of sales
(10 000)
Gross profit
4 500
Tax
(1 215)
SFP (dr =+)
Inventory
Retained earnings (opening balance)
(1 825)
For the group this sales transaction has now realised through H Ltd. selling the
inventory to an outside party. The group statements now need to show the profit
of R7 000 (and the tax on it at 27%). The revenue for the group must be R14 500
and the cost of sales must amount to R7 500. The credit against cost of sales
in the journal below decreases the R10 000 from H Ltd.’s records to R7 500,
which is correct for the group.
The consolidation journal entry is as follows:
Retained earnings (no group profit in year 1)
Income tax expense (profit increases in year 2)
Cost of sales
Debit
1 825
675
Credit
2 500
(profit of S Ltd. previously taken out now realises, therefore group profit increases)
2 - 37
The unrealised profit that is moved between year 1 and 2 was generated by the
subsidiary. As the NCI owns shares in the subsidiary, they are entitled to part of
that profit. Their share of the unrealised profit is therefore also moved from year
1 to year 2, when it effectively realises as a group profit. In the analysis below it
is clear that year 1’s profit is decreased (which is now part of retained earnings)
and year 2’s profit is increased. Then the apportionment to NCI is done and their
share of the profit is also moved between year 1 and 2.
Analysis of shareholder’s equity (Assume S Ltd.’s profit in its individual
statements is R40 000)
Total
On date of acquisition
Ordinary share capital
xxx
H Ltd. 80%
At
Since
xx
xx
Since acquisition
Till beginning of current year-YEAR
1
Retained earnings
Opening inventory / Closing year 1
(2 500 – 675)
Current year – YEAR 2
Profit for the year (SCI)
Profit in opening inventory(2500675)
Total equity
xx
xx
xx
xx
48 175
38 540
9 635
50 000
(1 825)
40 000
(1 460)
10 000
(365)
41 825
40 000
1 825
33 460
32 000
1 460
8 365
8 000
365
xx
xx
xx
xx
Retained earnings (opening balance) –decrease H Ltd.’s RE
Non-controlling interest (SFP)
Recognition of NCI in RE of subsidiary for Year 1
Non-controlling interest (SCI) – decrease H Ltd.’s profit
Non-controlling interest (SFP)
Recognition of NCI in profit in Year 2
2 - 38
NCI
Debit
9 635
Credit
9 635
Debit
8 365
Credit
8 365
The NCI is the minority shareholders of the subsidiary company. They own
shares in the subsidiary and are entitled to a share of the subsidiary’s profit and
net assets. They have no rights to the profit of the holding company, as they do
not own shares in the holding company. If the holding company therefore sells
inventory to the subsidiary and that inventory is not yet sold at year-end, the
unrealised profit is effectively profit that was made by the holding company. The
unrealised profit is still taken from the group’s profit, but the NCI does not share
in the profit as it is the holder’s profit that is decreased. The analysis of
shareholder’s equity only allocates the profit and equity of the subsidiary
between the holding company and the NCI because both are shareholders of
the subsidiary.
2.14.4 Intercompany sales of property, plant and equipment
As with the sale of inventory the unrealised intercompany profit with the sale of
property, plant and equipment should be eliminated on consolidation. If the
holding company made the profit there is no effect on the non-controlling
interest. If the subsidiary made the profit, the decrease in profit is allocated to
the non-controlling interest by using the analysis of shareholders’ equity.
Illustration:
Year 1
H Ltd. owns 90% of the issued ordinary shares of S Ltd. On the first day of year
1 S Ltd. sold equipment with a cost price of R30 000 to H Ltd. for an amount of
R42 000. The tax rate is 27%.Depreciation in the group is provided at 50% per
annum on the cost price. The remaining life of the equipment on the date of the
transaction was two years.
S Ltd. will realise a profit of R12 000. From the group’s perspective, however, it
is an unrealised profit. The equipment is also now recorded at a cost price of
R42 000 in H Ltd.’s records, while the group actually purchased the equipment
at a cost of R30 000 (by S Ltd.). The following eliminations must therefore be
done before consolidated statements can be compiled.
Profit with sale of assets (S Ltd.)
Equipment
Deferred tax (SFP)
Income tax expense (S Ltd.)
Debit
12 000
Credit
12 000
3 240
3 240
The situation is complicated even further as H Ltd. will provide depreciation
based on R42 000 in their individual financial statements, therefore R21 000 per
annum. According to the group the cost price of the equipment is only R30 000
and the annual provision for depreciation should only amount to R15 000.
2 - 39
Before consolidated statements can be compiled, this ‘excessive’ depreciation
must first be eliminated as follows:
Debit
Credit
Accumulated depreciation
6 000
Depreciation
6 000
Income tax expense
Deferred tax (SFP)
1 620
1 620
Please note:
The initial unrealised profit of R12 000 will realise over a period of
2 years as the depreciation is decreased by R6 000, and the profit therefore
increased by R6 000 each year. At the same time the initial deferred tax asset
of R3 240 will also decrease with an amount of R1 620 every year as it is
allocated to the income tax expense. This corresponds with the profit that
realises over the 2 year term in the group financial statements. The deferred tax
asset as well as the effect of the unrealised profit will therefore both be
eliminated at the end of the 2 years.
As it is the profit of S Ltd. that is decreased initially, S Ltd.’s profit will be
increased as the profit realises over the following 2 years (through use of the
asset). Therefore, even if the depreciation entry is made in H Ltd.’s financial
statements, the reversal of the extra depreciation will still affect the NCI. The
NCI thus shares in the initial decrease as well as the realisation later on.
Analysis of shareholder’s equity (Assume S Ltd.’s profit in its individual
statements is R50 000)
H Ltd. 90%
At
Since
Total
NCI
On date of acquisition
Ordinary share capital
xxx
xx
xx
Since acquisition
Till beginning of current year
Retained earnings
0
0
0
Current year - YEAR 1
Profit for the year (SCI)
Profit PPE (12 000–3 240)
Depreciation (6 000–1 620)
45 620
50 000
(8 760)
4 380
41 058
45 000
(7 884)
3 942
4 562
5 000
(876)
438
xx
xx
Total equity
xx
xx
xx
xx
xx
xx
Year 2 - opening balances
The individual statements must be consolidated again at the end of year 2. Once
again the abovementioned adjustments were NOT made in the individual
statements and year 2’s individual statements will not reflect these adjustments.
When year 2’s line items are therefore added, the abovementioned adjustments
must be made again so that year 2’s group statements’ opening balances
correspond to year 1’s group statements’ closing balances.
2 - 40
Year 1’s consolidation journals must therefore be repeated- but that which was
in the SCI, is now in retained earnings (profit, dep &tax).
Debit
8 760 *
3 240
Retained earnings
Deferred tax (SFP)
Equipment
Credit
12 000
Accumulated depreciation
Retained earnings
Deferred tax (SFP)
6 000
4 380 *
1 620
Year 2- closing balances
H Ltd. will again provide depreciation at R42 000, therefore R21 000 (based on
the cost price of equipment) in its individual financial statements during
year 2. According to the group the cost price of the equipment is only R30 000
and the annual depreciation should be R15 000.This ‘excessive’ depreciation
for year 2 must therefore also be eliminated as follows (please note: the same
journal as year 1):
Debit
Credit
Accumulated depreciation
6 000
Depreciation
6 000 #
Income tax expense
Deferred tax (SFP)
1 620 #
1 620
Analysis of shareholder’s equity (Assume S Ltd.’s profit in its individual
statements is R40 000)
Total
On date of acquisition
Ordinary share capital
xxx
xx
xx
H Ltd. 90%
At
Since
xx
xx
NCI
xx
xx
Since acquisition
Till beginning of current year- YEAR1
Retained earnings
Profit PPE year 1 (12 000 – 3 240)
Depreciation year 1 (6 000–1 620)
45 620
50 000
(8 760)
4 380
41 058
45 000
(7 884)
3 942
4 562
5 000
(876)
438
Current year - YEAR2
Profit for the year (SCI)
Depreciation year 2 (6 000–1 620)
44 380
40 000
4 380
39 942
36 000
3 942
4 438
4 000
438
xx
xx
Total equity
xx
2 - 41
xx
2.15
CONCLUSION
The consolidation process mainly involves:
•
The elimination of the total shareholders’ interest of the subsidiary, as at date
of acquisition, against the investment in the subsidiary. Please note: only
the shareholders’ interest as at date of acquisition is eliminated on
consolidation, all increases since that date are included in the consolidation.
•
The recognition of the minority shareholders’ portion of the profit or loss and
the net assets, as follows:
▪
▪
▪
In the consolidated statement of comprehensive income: The allocation
of the profit for the period as:
Attributable to:
Shareholders of the holding company
Non-controlling interest
In the consolidated statement of financial position as a line item – Noncontrolling interest as part of Equity.
In the consolidated statement of changes in equity–their portion of
increases of decreases in shareholders’ interest.
•
The goodwill as an asset in the consolidated statement of financial position.
•
The elimination of all intercompany transactions.
•
Adding the similar line items.
2 - 42
CHAPTER 2
CONSOLIDATED FINANCIAL STATEMENTS
QUESTIONS
Page
Question 2.1:
WHOLLY OWNED SUBSIDIARY
Basic consolidation
44
Question 2.2:
Question 2.3:
Goodwill
Dividends
45
48
Question 2.4:
Question 2.5:
Question 2.6:
Question 2.7:
Question 2.8:
Closing inventory
Opening and closing inventory
Opening and closing inventory
Loans and dividends payable
Equipment sold – current year
49
52
57
61
65
Question 2.9:
Question 2.10:
Additional
question 1:
Additional
question 2:
Equipment sold – previous year
Comprehensive question
Opening and closing inventory
69
73
76
Consolidation journals: PPE and Inventory
78
Assume retained earnings balances at acquisition are credit balances, unless
stated otherwise.
Questions on non-wholly owned subsidiaries will be provided in semester 2
when we continue with Group Statements.
2 - 43
QUESTION 2.1
H Ltd. purchased all the ordinary shares of S Ltd. for R118 000 on
1 October 2011. At this date all the assets and liabilities of S Ltd. were recorded at fair
value, and the retained earnings of S Ltd. amounted to R28 000. The following are the
abridged financial statements of H Ltd. and S Ltd. as at 30 September 2012, one year
after H Ltd. acquired the shares in S Ltd. No shares have been issued since 1 October
2011. Assume a tax rate of 27% for all financial years involved.
STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2012
ASSETS
Property, plant and equipment
Investment in S Ltd.
Debtors
Bank
Total assets
H Ltd.
40 000
118 000
22 000
35 000
215 000
S Ltd.
160 000
20 000
15 000
195 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Long term loan
Creditors
Total equity and liabilities
100 000
55 000
40 000
20 000
215 000
90 000
48 000
21 000
36 000
195 000
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 2012
H Ltd.
250 000
(150 000)
100 000
(40 000)
60 000
(16 000)
44 000
Revenue
Cost of sales
Gross profit
Other expenses
Profit before tax
Income tax expense
Profit for the year
S Ltd.
285 000
(130 000)
155 000
(125 000)
30 000
(10 000)
20 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 2012
Retained earnings
H Ltd.
S Ltd.
11 000
28 000
44 000
20 000
55 000
48 000
Opening balance
Profit for the year
Closing balance
YOU ARE REQUIRED TO:
Prepare the consolidated statement of comprehensive income, statement of changes
in equity (only retained earnings column) and statement of financial position of H Ltd.
and its subsidiary for the year ended 30 September 2012.
2 - 44
QUESTION 2.2
H Ltd. purchased all the ordinary shares of S Ltd. for R131 000 on
1 October 2010. At this date all the assets and liabilities of S Ltd. were recorded at fair
value, and the retained earnings of S Ltd. amounted to R22 000. The following are the
abridged financial statements of H Ltd. and S Ltd. as at 30 September 2012, two years
after H Ltd. acquired the shares in S Ltd. No shares have been issued since 1 October
2010. Assume a tax rate of 27% for all financial years involved.
STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2012
ASSETS
Property, plant and equipment
Investment in S Ltd.
Debtors
Bank
Total assets
H Ltd.
121 000
131 000
25 000
38 000
315 000
S Ltd.
260 000
80 000
35 000
375 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Long term loan
Creditors
Total equity and liabilities
100 000
155 000
40 000
20 000
315 000
90 000
65 000
121 000
99 000
375 000
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 2012
H Ltd.
350 000
(180 000)
170 000
(80 000)
90 000
(25 000)
65 000
Revenue
Cost of sales
Gross profit
Other expenses
Profit before tax
Income tax expense
Profit for the year
S Ltd.
290 000
(130 000)
160 000
(125 000)
35 000
(10 000)
25 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 2012
Retained earnings
H Ltd.
S Ltd.
90 000
40 000
65 000
25 000
155 000
65 000
Opening balance
Profit for the year
Closing balance
YOU ARE REQUIRED TO:
Prepare the consolidated statement of comprehensive income, statement of changes
in equity (only retained earnings column) and statement of financial position of H Ltd.
and its subsidiary for the year ended 30 September 2012.
2 - 45
QUESTION 2.2 (Suggested solution)
Analysis of shareholder’s equity
Total
H Ltd. 100%
With
Since
On acquisition date (1/10/2010)
Since acquisition
To beginning of current year
Current year
Consolidation journals:
Debit
Elimination of equity of S Ltd. on date of acquisition
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 2012
ASSETS
Non-current assets
Property, plant and equipment
Goodwill
Current assets
Debtors
Bank
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital
Retained earnings
Total equity
Non-current liabilities
Long term loan
Current liabilities
Creditors
Total equity and liabilities
2 - 46
Credit
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 2012
Revenue
Cost of sales
Gross profit
Other expenses
Profit before tax
Income tax expense
Profit for the year
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 2012
Retained
earnings
Opening balance
Profit for the year
Closing balance
2 - 47
QUESTION 2.3
H Ltd. purchased all the ordinary shares of S Ltd. for R100 000 on
1 October 2010. At this date all the assets and liabilities of S Ltd. were recorded at fair
value, and the retained earnings of S Ltd. amounted to R40 000. The following are the
abridged financial statements of H Ltd. and S Ltd. as at 30 September 2012, two years
after H Ltd. acquired the shares in S Ltd. No shares have been issued since 1 October
2010. Assume a tax rate of 27% for all financial years involved.
STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2012
ASSETS
Property, plant and equipment
Investment in S Ltd.
Debtors
Bank
Total assets
H Ltd.
180 000
100 000
25 000
18 000
323 000
S Ltd.
98 000
60 000
45 000
203 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Long term loan
Creditors
Total equity and liabilities
100 000
163 000
40 000
20 000
323 000
50 000
90 000
45 000
18 000
203 000
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 2012
H Ltd.
S Ltd.
Revenue
350 000
290 000
Cost of sales
(140 000)
(130 000)
Gross profit
210 000
160 000
Other income
12 000
5 000
Other expenses
(92 000)
(130 000)
Profit before tax
130 000
35 000
Income tax expense
(36 000)
(10 000)
Profit for the year
94 000
25 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 2012
Retained earnings
H Ltd.
S Ltd.
89 000
77 000
94 000
25 000
(20 000)
(12 000)
163 000
90 000
Opening balance
Profit for the year
Ordinary dividend
Closing balance
YOU ARE REQUIRED TO:
Prepare the consolidated statement of comprehensive income, statement of changes
in equity (only retained earnings column) and statement of financial position of H Ltd.
and its subsidiary for the year ended 30 September 2012.
2 - 48
QUESTION 2.4
H Ltd. purchased all the ordinary shares of S Ltd. for R200 000 on
1 January 2009. At this date all the assets and liabilities of S Ltd. were recorded at fair
value, and the retained earnings of S Ltd. amounted to R70 000. The following are the
abridged financial statements of H Ltd. and S Ltd. as at 31 December 2012. No shares
have been issued since 1 January 2009. Assume a tax rate of 27% for all financial
years involved.
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2012
ASSETS
Property, plant and equipment
Investment in S Ltd.
Inventory
Bank
Total assets
H Ltd.
360 000
200 000
60 000
26 000
646 000
S Ltd.
196 000
120 000
90 000
406 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Long term loan
Creditors
Total equity and liabilities
200 000
326 000
80 000
40 000
646 000
100 000
180 000
90 000
36 000
406 000
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2012
H Ltd.
700 000
(280 000)
420 000
30 000
(190 000)
260 000
(72 000)
188 000
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
S Ltd.
580 000
(260 000)
320 000
10 000
(260 000)
70 000
(20 000)
50 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2012
Retained earnings
H Ltd.
S Ltd.
178 000
154 000
188 000
50 000
(40 000)
(24 000)
326 000
180 000
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 49
Additional information:
H Ltd. sold inventory to S Ltd. at cost price plus 25%. At the end of 2012 S Ltd. had
inventory of R50 000 on hand that was purchased from H Ltd. Total inventory sales
from H Ltd. to S Ltd. during the current year amounted to R100 000.
YOU ARE REQUIRED TO:
Prepare the consolidated statement of comprehensive income, statement of changes
in equity (only retained earnings column) and statement of financial position of H Ltd.
and its subsidiary for the year ended 31 December 2012.
QUESTION 2.4 (Suggested solution)
Analysis of shareholder’s equity
On acquisition date (1/1/2009)
Ordinary share capital
Retained earnings
Goodwill
Cost price of investment
Total
H Ltd. 100%
With
Since
100 000
70 000
170 000
30 000
200 000
100 000
70 000
170 000
30 000
200 000
Since acquisition
To beginning of current year
Retained earnings
Current year
Profit for the year (SCI)
Ordinary dividend (SCE)
Total equity on 31 December 2012
Consolidation journals:
Ordinary share capital
Retained earnings
Goodwill
Investment in S Ltd.
Elimination of equity of S Ltd. on date of acquisition
Elimination of intercompany dividends
Elimination of intercompany sales
Elimination of unrealised profit in closing inventory
2 - 50
Debit
100 000
70 000
30 000
Credit
200 000
Tax effect on unrealised profit
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2012
ASSETS
Non-current assets
Property, plant and equipment
Goodwill
Deferred tax
Current assets
Inventory
Bank
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital
Retained earnings (from SCE)
Total equity
Non-current liabilities
Long term loan
Current liabilities
Creditors
Total equity and liabilities
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2012
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
730 000
296 000
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2012
Retained
earnings
Opening balance
Profit for the year (from SCI)
Ordinary dividend (only holding)
Closing balance
2 - 51
QUESTION 2.5
H Ltd. purchased all the ordinary shares of S Ltd. for R200 000 on
1 January 2009. At this date all the assets and liabilities of S Ltd. were recorded at fair
value, and the retained earnings of S Ltd. amounted to R70 000. The following are the
abridged
financial
statements
of
H
Ltd.
and
S
Ltd.
as
at
31 December 2012. No shares have been issued since 1 January 2009. Assume a
tax rate of 27% for all financial years involved.
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2012
ASSETS
Property, plant and equipment
Investment in S Ltd.
Inventory
Bank
Total assets
H Ltd.
360 000
200 000
60 000
26 000
646 000
S Ltd.
196 000
120 000
90 000
406 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Long term loan
Creditors
Total equity and liabilities
200 000
326 000
80 000
40 000
646 000
100 000
180 000
90 000
36 000
406 000
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2012
H Ltd.
700 000
(280 000)
420 000
30 000
(190 000)
260 000
(72 000)
188 000
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
S Ltd.
580 000
(260 000)
320 000
10 000
(260 000)
70 000
(20 000)
50 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2012
Retained earnings
H Ltd.
S Ltd.
178 000
154 000
188 000
50 000
(40 000)
(24 000)
326 000
180 000
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 52
Additional information:
H Ltd. sold inventory to S Ltd. at cost price plus 25%. On 31 December 2011 R10 000
of the closing inventory of S Ltd. was purchased from H Ltd.
On
31 December 2012 S Ltd. had inventory of R50 000 on hand that was purchased from
H Ltd. Total inventory sales from H Ltd. to S Ltd. during the current year amounted to
R100 000.
YOU ARE REQUIRED TO:
Prepare the consolidated statement of comprehensive income, statement of changes
in equity (only retained earnings column) and statement of financial position of H Ltd.
and its subsidiary for the year ended 31 December 2012.
2 - 53
QUESTION 2.5 (Suggested solution)
Analysis of shareholder’s equity
Total
H Ltd. 100%
With
Since
On acquisition date (1/1/2009)
Ordinary share capital
Retained earnings
Goodwill
Cost price of investment
Since acquisition
To beginning of current year
Current year
Total equity on 31 December 2012
Consolidation journals:
Debit
Elimination of equity of S Ltd. on date of acquisition
Elimination of intercompany dividends
Elimination of intercompany sales
Elimination of unrealised profit in closing inventory
Tax effect on unrealised profit
Realisation of previous year’s unrealised profit
2 - 54
Credit
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2012
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Inventory
Bank
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital
Retained earnings
Total equity
Non-current liabilities
Long term loan
Current liabilities
Creditors
Total equity and liabilities
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2012
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2012
Retained
earnings
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 55
QUESTION 2.6
H Ltd. purchased all the ordinary shares of S Ltd. for R185 000 on
1 January 2009. At this date all the assets and liabilities of S Ltd. were recorded at fair
value, and the retained earnings of S Ltd. amounted to R55 000. The following are the
abridged
financial
statements
of
H
Ltd.
and
S
Ltd.
as
at
31 December 2012. No shares have been issued since 1 January 2009. Assume a
tax rate of 27% for all financial years involved.
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2012
ASSETS
Property, plant and equipment
Investment in S Ltd.
Inventory
Bank
Total assets
H Ltd.
300 000
185 000
75 000
36 000
596 000
S Ltd.
200 000
95 000
40 000
335 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Long term loan
Creditors
Total equity and liabilities
200 000
263 000
85 000
48 000
596 000
100 000
109 000
90 000
36 000
335 000
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2012
H Ltd.
590 000
(280 000)
310 000
35 000
(185 000)
160 000
(45 000)
115 000
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
S Ltd.
650 000
(360 000)
290 000
18 000
(220 000)
88 000
(24 000)
64 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2012
Retained earnings
H Ltd.
S Ltd.
183 000
65 000
115 000
64 000
(35 000)
(20 000)
263 000
109 000
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 56
Additional information:
H Ltd. purchases all its inventory from S Ltd. at cost price plus 20%. On
31 December 2011 H Ltd.’s closing inventory was R30 000. Total inventory sales from
S Ltd. to H Ltd. during the current year amounted to R325 000.
YOU ARE REQUIRED TO:
Prepare the consolidated statement of comprehensive income, statement of changes
in equity (only retained earnings column) and statement of financial position of H Ltd.
and its subsidiary for the year ended 31 December 2012.
QUESTION 2.6 (Suggested solution)
Analysis of shareholder’s equity
On acquisition date (1/1/2009)
Ordinary share capital
Retained earnings
Goodwill
Cost price of investment
Since acquisition
To beginning of current year
Retained earnings (65 000 – 55 000)
Opening inventory
Current year
Profit for the year
Opening inventory
Closing inventory
Ordinary dividend (SCE)
Total equity on 31 December 2012
2 - 57
Total
H Ltd. 100%
With
Since
100 000
55 000
155 000
30 000
185 000
100 000
55 000
155 000
30 000
185 000
10 000
10 000
64 000
64 000
(20 000)
(20 000)
Consolidation journals:
Ordinary share capital
Retained earnings
Goodwill
Investment in S Ltd.
Elimination of equity of S Ltd. on date of acquisition
Elimination of intercompany dividends
Elimination of intercompany sales
Elimination of unrealised profit in closing inventory
Tax effect on unrealised profit
Realisation of previous year’s unrealised profit
2 - 58
Debit
100 000
55 000
30 000
Credit
185 000
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2012
ASSETS
Non-current assets
Property, plant and equipment (300 + 200)
Goodwill
Deferred tax
Current assets
Inventory
Bank (36 + 40)
Total assets
500 000
30 000
76 000
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital
Retained earnings
Total equity
Non-current liabilities
Long term loan (85 + 90)
Current liabilities
Creditors (48 + 36)
Total equity and liabilities
200 000
175 000
84 000
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2012
Revenue (590 + 650 –325)
Cost of sales (280 + 360 – 325 + 12.5 – 5)
Gross profit
Other income (35 + 18 – 20)
Other expenses (185 + 220)
Profit before tax
Income tax expense (45 + 24
Profit for the year
915 000
(322 500)
592 500
33 000
(405 000)
220 500
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2012
Retained
earnings
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 59
QUESTION 2.7
H Ltd. purchased all the ordinary shares of S Ltd. for R95 000 on 1 July 2010. At this
date all the assets and liabilities of S Ltd. were recorded at fair value, and the retained
earnings of S Ltd. amounted to R14 000. The following are the abridged financial
statements of H Ltd. and S Ltd. as at 30 June 2012. No shares have been issued since
1 July 2010. Assume a tax rate of 27% for all financial years involved.
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 2012
ASSETS
Property, plant and equipment
Investment in S Ltd.
Loan to S Ltd.
Debtors
Dividends receivable
Bank
Total assets
H Ltd.
180 000
95 000
45 000
25 000
12 000
18 000
375 000
S Ltd.
120 000
60 000
45 000
225 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Loan from H Ltd.
Creditors
Dividends payable
Total equity and liabilities
150 000
130 000
72 500
22 500
375 000
70 000
82 000
45 000
16 000
12 000
225 000
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2012
H Ltd.
340 000
(130 000)
210 000
12 000
(90 000)
6 000
(2 500)
135 500
(38 000)
97 500
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Finance income
Finance charges
Profit before tax
Income tax expense
Profit for the year
S Ltd.
285 000
(120 000)
165 000
15 000
(120 000)
3 000
(5 000)
58 000
(16 000)
42 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2012
Retained earnings
H Ltd.
S Ltd.
55 000
52 000
97 500
42 000
(22 500)
(12 000)
130 000
82 000
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 60
Additional information:
The loan between H Ltd. and S Ltd. bears interest at 10% per year. No capital was
repaid during the 2012 financial year.
YOU ARE REQUIRED TO:
Prepare the consolidated statement of comprehensive income, statement of changes
in equity (only retained earnings column) and statement of financial position of H Ltd.
and its subsidiary for the year ended 30 June 2012.
QUESTION 2.7 (Suggested solution)
Analysis of shareholder’s equity
Total
On acquisition date (1/7/2010)
Ordinary share capital
Retained earnings
Goodwill
Cost price of investment
Since acquisition
To beginning of current year
Retained earnings (52 – 14)
Current year
Profit for the year (SCI)
Ordinary dividend (SCE)
Total equity on 30 June 2012
2 - 61
H Ltd. 100%
With
Since
Consolidation journals:
Debit
Ordinary share capital
Retained earnings
Goodwill
Investment in S Ltd.
Elimination of equity of S Ltd. on date of acquisition
Elimination of intercompany dividends
Elimination of dividends payable by S to H
Elimination of intercompany loan
Elimination of interest on intercompany loan
2 - 62
Credit
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 2012
ASSETS
Non-current assets
Property, plant and equipment
Goodwill
Current assets
Debtors
Bank
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital
Retained earnings
Total equity
Current liabilities
Creditors
Dividends payable
Total equity and liabilities
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2012
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Finance income
Finance charges
Profit before tax
Income tax expense
Profit for the year
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2012
Retained
earnings
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 63
QUESTION 2.8
H Ltd. purchased all the ordinary shares of S Ltd. for R270 000 on 1 April 2009. At this
date all the assets and liabilities of S Ltd. were recorded at fair value, and the retained
earnings of S Ltd. amounted to R82 000. The following are the abridged financial
statements of H Ltd. and S Ltd. as at 31 March 2012. No shares have been issued
since 1 April 2009. Assume a tax rate of 27% for all financial years involved.
STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH 2012
ASSETS
Property, plant and equipment
Investment in S Ltd.
Inventory
Bank
Total assets
H Ltd.
450 000
270 000
110 000
55 000
885 000
S Ltd.
300 000
140 000
60 000
500 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Long term loan
Creditors
Total equity and liabilities
300 000
395 000
127 000
63 000
885 000
150 000
163 000
135 000
52 000
500 000
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2012
H Ltd.
885 000
(420 000)
465 000
92 000
(317 000)
240 000
(67 000)
173 000
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
S Ltd.
975 000
(540 000)
435 000
27 000
(330 000)
132 000
(37 000)
95 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2012
Retained earnings
H Ltd.
S Ltd.
274 000
98 000
173 000
95 000
(52 000)
(30 000)
395 000
163 000
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 64
Additional information:
H Ltd. sold new equipment to S Ltd. for R150 000 on 1 April 2011. H Ltd. made a profit
of R35 000 on this transaction. Both H Ltd. and S Ltd. depreciate equipment over five
years according to the straight-line method.
YOU ARE REQUIRED TO:
Prepare the consolidated statement of comprehensive income, statement of changes
in equity (only retained earnings column) and statement of financial position of H Ltd.
and its subsidiary for the year ended 31 March 2012.
QUESTION 2.8 (Suggested solution)
Analysis of shareholder’s equity
Total
On acquisition date (1/4/2009)
Ordinary share capital
Retained earnings
Goodwill
Cost price of investment
Since acquisition
To beginning of current year
Retained earnings
Current year
Profit for the year (SCI)
Ordinary dividend (SCE)
Total equity on 31 March 2012
2 - 65
H Ltd. 100%
With
Since
Consolidation journals:
Ordinary share capital
Retained earnings
Goodwill
Investment in S Ltd.
Elimination of equity of S Ltd. on date of acquisition
Elimination of intercompany dividends
Elimination of unrealised intercompany profit
Tax effect on unrealised profit
Realisation of a portion of unrealised profit
Tax effect on realisation of unrealised profit
2 - 66
Debit
Credit
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2012
ASSETS
Non-current assets
Property, plant and equipment
Goodwill
Deferred tax
Current assets
Inventory
Bank
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital
Retained earnings
Total equity
Non-current liabilities
Long term loan
Current liabilities
Creditors
Total equity and liabilities
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2012
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2012
Retained
earnings
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 67
QUESTION 2.9
H Ltd. purchased all the ordinary shares of S Ltd. for R270 000 on 1 April 2009. At this
date all the assets and liabilities of S Ltd. were recorded at fair value, and the retained
earnings of S Ltd. amounted to R82 000. The following are the abridged financial
statements of H Ltd. and S Ltd. as at 31 March 2012. No shares have been issued
since 1 April 2009. Assume a tax rate of 27% for all financial years involved.
STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH 2012
ASSETS
Property, plant and equipment
Investment in S Ltd.
Inventory
Bank
Total assets
H Ltd.
450 000
270 000
110 000
55 000
885 000
S Ltd.
300 000
140 000
60 000
500 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Long term loan
Creditors
Total equity and liabilities
300 000
395 000
127 000
63 000
885 000
150 000
163 000
135 000
52 000
500 000
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2012
H Ltd.
885 000
(420 000)
465 000
92 000
(317 000)
240 000
(67 000)
173 000
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
S Ltd.
975 000
(540 000)
435 000
27 000
(330 000)
132 000
(37 000)
95 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2012
Retained earnings
H Ltd.
S Ltd.
274 000
98 000
173 000
95 000
(52 000)
(30 000)
395 000
163 000
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 68
Additional information:
S Ltd. sold new equipment with a cost price of R75 000 to H Ltd. for a profit of 20% on
cost price on 1 April 2009. Both H Ltd. and S Ltd. depreciate equipment at 25% per
year according to the straight-line method.
YOU ARE REQUIRED TO:
Prepare the consolidated statement of comprehensive income, statement of changes
in equity (only retained earnings column) and statement of financial position of H Ltd.
and its subsidiary for the year ended 31 March 2012.
QUESTION 2.9 (Suggested solution)
Analysis of shareholder’s equity
On acquisition date (1/4/2009)
Ordinary share capital
Retained earnings
Goodwill
Cost price of investment
Total
H Ltd. 100%
With
Since
150 000
82 000
232 000
38 000
270 000
150 000
82 000
232 000
38 000
270 000
Since acquisition
To beginning of current year
Retained earnings (98 000 – 82 000)
Profit PPE
Depreciation
16 000
16 000
Current year
Profit for the year
Depreciation
95 000
95 000
(30 000)
(30 000)
Ordinary dividend (SCE)
Total equity on 31 March 2012
2 - 69
Consolidation journals:
Ordinary share capital
Retained earnings
Goodwill
Investment in S Ltd.
Elimination of equity of S Ltd. on date of acquisition
Elimination of intercompany dividends
Elimination of intercompany profit on asset sold in 2010
Realisation of unrealised profit in 2010 and 2011
Realisation of unrealised profit in 2012
Tax effect on realisation of unrealised profit
2 - 70
Debit
150 000
82 000
38 000
Credit
270 000
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2012
ASSETS
Non-current assets
Property, plant and equipment (450 + 300
Goodwill
Deferred tax (
)
Current assets
Inventory (110 + 140)
Bank (55 + 60)
Total assets
)
746 250
38 000
250 000
115 000
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital
Retained earnings
Total equity
Non-current liabilities
Long term loan (127 + 135)
Current liabilities
Creditors (63 + 52)
Total equity and liabilities
300 000
262 000
115 000
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2012
Revenue (885 + 975)
Cost of sales (420 + 540)
Gross profit
Other income (92 + 27 – 30)
Other expenses (317 + 330
Profit before tax
Income tax expense (67 + 37
Profit for the year
)
1 860 000
(960 000)
900 000
89 000
(643 250)
345 750
)
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2012
Retained
earnings
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 71
QUESTION 2.10
H Ltd. purchased all the ordinary shares of S Ltd. for R154 000 on
1 January 2009. At this date all the assets and liabilities of S Ltd. were recorded at fair
value, and the retained earnings of S Ltd. amounted to R46 000. The following are the
abridged
financial
statements
of
H
Ltd.
and
S
Ltd.
as
at
31 December 2012. No shares have been issued since 1 January 2009. Assume a
tax rate of 27% for all financial years involved.
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2012
ASSETS
Property, plant and equipment
Investment in S Ltd.
Loan to H Ltd.
Inventory
Dividends receivable
Debtors
Total assets
H Ltd.
250 000
154 000
60 000
16 500
32 500
513 000
S Ltd.
167 000
20 000
59 000
34 500
280 500
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Long term loan
Creditors
Dividends payable
Total equity and liabilities
160 000
219 000
71 000
34 000
29 000
513 000
80 000
91 000
58 500
34 500
16 500
280 500
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2012
H Ltd.
492 000
(233 000)
259 000
40 000
(152 000)
147 000
(41 000)
106 000
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
S Ltd.
540 000
(300 000)
240 000
58 000
(223 000)
75 000
(21 000)
54 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2012
Retained earnings
H Ltd.
S Ltd.
142 000
53 500
106 000
54 000
(29 000)
(16 500)
219 000
91 000
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 72
Additional information:
H Ltd. purchases all its inventory from S Ltd. at cost price plus 20%. On
31 December 2011 H Ltd.’s closing inventory was R17 400. Total inventory sales from
S Ltd. to H Ltd. during the current year amounted to R275 600.
On
31 December 2012 H Ltd. has not yet paid for inventory purchases worth R12 000.
S Ltd. sold new equipment to H Ltd. for a profit of 35% on cost price on
1 January 2011. The selling price of the equipment was R67 500. Both H Ltd. and
S Ltd. depreciate equipment at 20% per year according to the straight-line method.
The loan from S Ltd. to H Ltd. bears interest at 15% per year. The interest is paid from
internal funds at the end of each month. The loan is included in the other long term
loans of H Ltd. The capital balance of the loan is repayable in annual instalments of
R10 000 on 30 June each year. The interest was incorrectly included in other income
and expenses.
YOU ARE REQUIRED TO:
Prepare the consolidated statement of comprehensive income, statement of changes
in equity (only retained earnings column) and statement of financial position of H Ltd.
and its subsidiary for the year ended 31 December 2012.
2 - 73
QUESTION 2.10 (Suggested solution)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2012
ASSETS
Non-current assets
Property, plant and equipment
Goodwill
Deferred tax
Current assets
Inventory
Debtors
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the holding company
Ordinary share capital
Retained earnings
Total equity
Non-current liabilities
Long term loan
Current liabilities
Creditors
Dividends payable
Total equity and liabilities
2 - 74
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2012
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
491 900
201 900
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2012
Retained
earnings
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 75
Additional question 1
H Ltd. purchased all the ordinary shares of S Ltd. for R200 000 on
1 January 2019. At this date all the assets and liabilities of S Ltd. were recorded at fair
value, and the retained earnings of S Ltd. amounted to R70 000. The following are the
abridged
financial
statements
of
H
Ltd.
and
S
Ltd.
as
at
31 December 2022. No shares have been issued since 1 January 2019. Assume a
tax rate of 27% for all financial years involved.
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2022
ASSETS
Property, plant and equipment
Investment in S Ltd.
Inventory
Bank
Total assets
H Ltd.
360 000
200 000
60 000
26 000
646 000
S Ltd.
196 000
120 000
90 000
406 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Long term loan
Creditors
Total equity and liabilities
200 000
326 000
80 000
40 000
646 000
100 000
180 000
90 000
36 000
406 000
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2022
H Ltd.
700 000
(280 000)
420 000
30 000
(190 000)
260 000
(72 000)
188 000
Revenue
Cost of sales
Gross profit
Other income
Other expenses
Profit before tax
Income tax expense
Profit for the year
S Ltd.
580 000
(260 000)
320 000
10 000
(260 000)
70 000
(20 000)
50 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2022
Retained earnings
H Ltd.
S Ltd.
178 000
154 000
188 000
50 000
(40 000)
(24 000)
326 000
180 000
Opening balance
Profit for the year
Ordinary dividend
Closing balance
2 - 76
Additional information:
H Ltd. sells inventory to S Ltd. at cost price plus 20%. On 31 December 2022 S Ltd.
had inventory of R36 000 on hand that was purchased from H Ltd (31 December 2021:
R40 000). Total inventory sales from H Ltd. to S Ltd. during the current year amounted
to R100 000.
YOU ARE REQUIRED TO:
Prepare the consolidated statement of comprehensive income, statement of changes
in equity (only retained earnings column) and statement of financial position of H Ltd.
and its subsidiary for the year ended 31 December 2022.
2 - 77
Additional question 2
H Ltd. purchased all the ordinary shares of S Ltd. for R350 000 on
1 January 2015. On this date all the assets and liabilities of S Ltd. were recorded at
fair value and the retained earnings of S Ltd. amounted to R160 000. The following are
the statement of financial position of H Ltd. and S Ltd. as at 30 June 2018. No shares
have been issued since 1 January 2015.
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 2018
ASSETS
Property, plant and equipment
Investment in subsidiaries (S Ltd.)
Inventory
Debtors and other receivables
Total assets
H Ltd.
945 000
350 000
260 000
140 000
1 695 000
S Ltd.
615 000
75 000
90 000
780 000
EQUITY AND LIABILITIES
Ordinary share capital
Retained earnings
Creditors and other payables
Total equity and liabilities
340 000
869 000
486 000
1 695 000
150 000
463 000
167 000
780 000
Additional information:
1.
H Ltd. purchases all its inventory from S Ltd. at cost price plus 25%. H Ltd.’s
closing inventory was R240 000 on 30 June 2017. Total sales of inventory from
S Ltd. to H Ltd. during the year amounted to R400 000.
2.
H Ltd. sold new equipment with a cost price of R320 000 to S Ltd. for R500 000
on 1 July 2015. Both H Ltd. and S Ltd. write off depreciation on equipment at 25%
per year according to the straight-line method.
3.
The tax rate is 27%.
YOU ARE REQUIRED TO:
prepare the consolidation journal entries of H Ltd. and its subsidiary with regards to
inventory and property, plant and equipment for the financial year ended
30 June 2018. Journal narrations and year-end closing journal entries are not
required.
2 - 78