for Accounting Professionals
CONSOLIDATION PART 2
2011
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CONSOLIDATION PART 2
IFRS WORKBOOKS
(1 million downloaded)
Welcome to IFRS Workbooks! These are the latest versions of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the
European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation.
The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade
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edited the first two versions. We are proud to realise his vision.
Robin Joyce
Professor of the Chair of
International Banking and Finance
Financial University
under the Government of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking
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Moscow, Russia
2011 Updated
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CONSOLIDATION PART 2
(ii) determining the acquisition date;
CONTENTS
1.
Consolidation Introduction
3
2.
Definitions
4
3.
Intra Group Trading
5
4.
Dividends Paid out of Pre-Acquisition Profits
5.
Dividends Paid out of Post-Acquisition Profits 15
6.
Intra-Group Asset Sales
18
7.
Vertically Integrated Groups
19
8.
Consolidated Income Statements
21
9.
Multiple Choice Questions
24
13
10. Exercise Questions
25
11. Solutions
37
1.
Consolidation Introduction
Aim
The aim of this workbook is to assist in understanding consolidation
methodology for IFRS.
Approach
To consolidate a business combination requires:
(i) identifying the acquirer;
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(iii) recognising and measuring the identifiable assets acquired,
liabilities assumed and any non-controlling interest in the acquiree;
and
(iv) recognising and measuring goodwill or a gain from a bargain
purchase.
Before commencing a consolidation, the accountant should have
the full financial statements of the parent and subsidiaries produced
as of the same date, and using the same accounting policies.
Where possible, all subsidiary year-ends must be the same as the
parent undertaking.
Under IFRS 10, the maximum permitted difference is 3 months.
Adjustment should be made for any significant differences created
by any subsidiary having a different accounting date.
The length of reporting periods, and any difference in the reporting
dates, should be consistent from period to period. This will make
the corresponding figures from previous accounting periods more
easily comparable.
Transactions and balances between group undertakings should be l
reconciled and listed.
Where an undertaking has been purchased or sold, the financial
statements at the time of acquisition or sale should be on hand.
Spreadsheets are ideal for producing consolidated balance sheets
and income statements, although bespoke consolidated software is
available.
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CONSOLIDATION PART 2
At a practical level, to ensure consistency of treatment, a
consolidation pack is prepared for each group company detailing
standard adjustments, reconciliation’s, forms, and spreadsheets.
This makes assembly of the final group reports much simpler and
reduces the possibilities of different interpretations by the financial
controllers of each group company.
Other Workbooks
Consolidation 1 and 3 concentrate on practical consolidation and
dealing with Associates and Joint Ventures.
The IFRS 3 workbook concentrates on that standard which
provides guidance on specific points, such as the purchase of
companies in stages, loss of control but retention of an associate
and reverse takeovers.
IAS 27 has been replaced by IFRS 10 for consolidated financial
statements. IFRS 11 has replaced IAS 31. The new standards are
effective from 2013.
The earlier standards can be used until then.
2.
Definitions
Undertaking
An undertaking is any business, either incorporated or
unincorporated.
Group, or business combination
Two or more companies where one company controls the other(s).
Consolidated accounts will be required if one business controls
another, whatever are the means of control.
Dissimilar business activities must be consolidated, if they
controlled by the parent undertaking.
Control
Control is the power to govern the financial and operating policies
of an undertaking to obtain benefits.
Indications of control are:

Ownership of more than 50% of the voting rights.

Effective control over more than 50% of the voting rights. For
example, a husband owns 30% and a wife owns 40%. As
they are connected parties, they can exercise control over
the subsidiary.

Controlling the composition of the board of directors. For
example if A controls B and B controls C, the A controls C.
Minority Interest (now called non-controlling interests)
Minority interest is the part of the net assets of a subsidiary
attributable to others outside the group.
Parent (now called controlling interests)
A parent is an undertaking that controls another undertaking.
Subsidiary
A subsidiary is an undertaking that is controlled by another.
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Fair value The price that would be received to sell an asset, or
paid to transfer a liability, in an orderly transaction
between market participants at the measurement
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CONSOLIDATION PART 2
date. (IFRS 13)
Monetary assets
Monetary assets are money held, assets receivable, and liabilities
payable, in cash or cash equivalents.
Uniting of Interests
Uniting (or pooling) of interests was an alternative method of
consolidation. It reflects the merger of two, or more, interests,
where no undertaking can be identified as the acquirer.
IFRS 3 eliminated this method as an option for acquisitions.
Associate
An undertaking in which the parent has significant influence, but is
neither its subsidiary, nor part of a joint venture of the parent.
Indications of significant influence are:


Ownership of 20-50% of the voting shares
3. Intra Group Trading
Example 1
Parent Balance Sheet
Assets
Cash
Accounts receivable
Investments
Fixed Assets
On consolidation, these always cancel each other out.
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400
500
1700
Then, the parent loans 100 to the subsidiary.
Subsidiary Balance Sheet
Assets
Cash
Accounts receivable
Investments
Fixed Assets
A joint venture is an undertaking subject to the joint control of two or
more enterprises. The joint control is usually governed by a contract
between the parties.
Intra Group Trading
When the parent trades with a subsidiary, the parent’s balance
sheet shows an asset/liability, and an equal, but opposite,
asset/liability is shown in the balance sheet of the subsidiary.
800
The parent buys 100% of the subsidiary. It pays 270 cash.
Representation on the Board of Directors
Joint Venture
Liabilities
400 Accounts payable
1000 Accruals
200 Shareholders’ Funds
100 Profit and loss
Account
1700
Liabilities
20 Accounts
payable
400
100
50 Shareholders’
Funds
570
300
270
570
Parent Balance Sheet (after acquisition & loan
transaction)
Assets
Cash
Accounts receivable
Investments
Investment in S
Liabilities
30 Accounts payable
1000
200 Accruals
270
800
400
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CONSOLIDATION PART 2
Loan to subsidiary
Fixed Assets
100
100 Shareholders’
Funds
1700
2000
500
1700
Note: Cash= 400-270-100=30
Subsidiary Balance Sheet
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
120 Accounts
payable
400 Loan from
Parent
100
50 Shareholders’
Funds
670
2000
300
Note:
Cash= 30+120=150
Investments= (470-270)+100 =300
The loan has been eliminated on consolidation.
All transactions between parent and subsidiary are accounted for
through the subsidiary account (in the parent’s books) and the
parent account (in the subsidiaries books).
These accounts are always equal and opposite, and cancel out on
consolidation.
100
In the next example, the subsidiary is 100% owned and cost 270
cash.
270
670
The parent buys an investment security for 100 from a subsidiary
that paid 90 for it.
No cash has been transferred between the companies to settle this
transaction at the balance sheet date.
Note: Cash= 20+100=120
The asset in the parent balance sheet is equal, but opposite, to the
liability in the subsidiary balance sheet.
Group Balance Sheet
Liabilities
150 Accounts
1100
payable
Accounts receivable 1400
Investments
300 Accruals
400
Fixed Assets
150 Shareholders’
500
Funds
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The subsidiary shows 100 owing from the parent company and a
profit of 10 from the sale of the investment.
Example 2 Intra Group Profit:
Parent Balance Sheet (after acquisition)
Assets
Cash
Assets
Cash
Accounts receivable
Investments
Liabilities
30 Accounts
payable
1000
200 Accruals
800
300
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CONSOLIDATION PART 2
Investment in subsidiary
Fixed Assets
270
100 Shareholders’
Funds
1600
Cr Investments 90
500
1600
The Parent’s Balance Sheet shows an increase in investments of
100 and 100 owing to the subsidiary.
Subsidiary Balance Sheet (before transaction)
Assets
Cash
Accounts receivable
Investments
Fixed Assets
20
400
100
50
Liabilities
Accounts
payable
Shareholders’
Funds
570
Parent Balance Sheet (after transaction)
270
Assets
Cash
30
Accounts receivable
1000
Investments
300
Investment in Subsidiary 270
Fixed Assets
100
570
1700
300
Accounts
receivable
Investments
Parent account
Fixed Assets
Liabilities
Accounts
payable
300
100
500
1700
The profit is not realised as far as the group is concerned so it has
to be eliminated on consolidation.
Subsidiary Balance Sheet (after transaction)
20
Accruals
Subsidiary account
Shareholders’
Funds
800
Note: Investments= 200+100=300
Note: All investments are stated at cost
Assets
Cash
Liabilities
Accounts payable
300
400
10
100
Shareholders’
Funds
50 Profit
580
270
10
580
Notes:
Dr Parent account 100
Cr Profit 10
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Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Group Balance Sheet
Liabilities
50 Accounts
payable
1400
300 Accruals
150 Shareholders’
Funds
1900
1100
300
500
1900
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CONSOLIDATION PART 2
Note:
Investments= 300-10+10=300
Details of the bookkeeping are on the next page:
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CONSOLIDATION PART 2
Derivation of Group
Figures
Parent
Dr
Assets
Cash
Accounts receivable
Investments
Investment in S
Parent Subsidiary
Fixed Assets
Cr
30
1000
300
270
Subsidiary
Adjustments
Dr
Dr
Cr
20
400
10
100
100
10
270
100
50
800
300
300
Shareholders’ Funds
500
280
280
580
280
1700
1700
580
Dr
Cr
50
1400
300
150
Liabilities
Accounts payable
Accruals
TOTAL
Cr
Total
1100
300
500
280
1900
1900
The adjustment eliminates the investment in subsidiary, and the 10 profit created by the intra group transaction.
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CONSOLIDATION PART 2
Example 3 Realised Intra Group Profits
Subsidiary Balance Sheet (same as in the previous
example)
The parent buys a security for 100 from a subsidiary that paid 90 for
it, as in the previous example.
Next the parent sold the investments to another client, outside the
group, for 120.
This means that the group profit on the transaction is
120-90=30.
Assets
Cash
Accounts
receivable
Investments
Parent account
Liabilities
20 Accounts
payable
400
10
100 Shareholders’
Funds
50 Retained Earnings
580
300
270
This profit is realised, as it has been sold outside the group.
20 of the profit is found in the parent and 10 in the subsidiary.
Fixed Assets
In this example, the subsidiary is 100% owned, and cost 270 cash,
as in the previous example. The Balance sheets are stated after
both acquisition of subsidiary and the intra group purchase of the
investment, but before sale outside the group.
Then the parent sells the investment to a third party for 120 cash.
Parent Balance Sheet (same as in the previous
example)
Assets
Cash
Accounts
receivable
Investments
Investment in
subsidiary
Fixed Assets
Liabilities
30 Accounts
payable
1000
300 Accruals
270 Subsidiary
account
100 Shareholders’
Funds
1700
10
580
In this case, all of the profit is realised as the investment has been
sold outside the group.
Note that even if the subsidiary is only partly-owned,
all unrealised profit is fully eliminated on consolidation.
Parent Balance Sheet (after Sale)
800
Assets
Cash
300
100
Accounts
receivable
Investments
Investment in S
500
Fixed Assets
1700
Liabilities
150 Accounts
payable
1000 Accruals
200 Subsidiary a/c
270 Shareholders’
Funds
100 Retained
Earnings
1720
800
300
100
500
20
1720
Notes:
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CONSOLIDATION PART 2
Cash= 30+120=150
Investments= 300-100=200
The profit is now realised by the group.
The retained earning is the profit on sale attributable to the parent.
EXAMPLE 1. – partly-owned subsidiaries
Group Balance Sheet (after sale)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
170 Accounts
payable
1400
210 Accruals
150 Shareholders’
Funds
Retained
Earnings
1930
In the following examples, I/B refers to Income Statement and
Balance Sheet (SFP).
1100
P has a subsidiary S, of which it owns 70%. At the balance
sheet date S has inventories that it bought from P at a cost
of 100. P made a profit of 20 on the sale.
300
500
As the profit was earned by the parent, all the profit is
eliminated. (There is no impact on minority interests.)
30
1930
Notes:
Cash= 150+20=170
Accounts Receivable= 1000+400= 1400
Investments= 200+10=210
Accounts payable= 800+300= 1100
Retained Earnings= 10+20=30
This is the parent’s profit on sale (20) and the post acquisition
profit of the subsidiary (10).
Intra-group profits – partly-owned subsidiaries and associates
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Revenue
Cost of sales
Inventory
Reduction of group sales, cost of
sales and profit in P’s inventory
I/B
I
I
B
DR
100
CR
80
20
EXAMPLE 2. – partly-owned subsidiaries
P has a subsidiary S, of which it owns 70%. At the balance
sheet date P has inventories that it bought from S at a cost
of 100. S made a profit of 20 on the sale.
Revenue
I/B
I
DR
100
CR
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CONSOLIDATION PART 2
Cost of sales
Inventory
Reduction of group sales, cost of
sales and profit in P’s inventory
Minority interests (balance sheet)
(30%*20)
Minority interests (income statement)
Reducing the profit related to minority
interests
I
B
80
20
B
P has an associate A, of which it owns 20%. At the balance
sheet date P has inventories that it bought from A at a cost
of 100. A made a profit of 25 on the sale.
6
I
6
Share of income of associates
Investment in associate (20%*25)
Reduction of group net income, and
investment in associate
EXAMPLE 3. - associates
P has an associate A, of which it owns 20%. At the balance
sheet date A has inventories that it bought from P at a cost
of 100. P made a profit of 25 on the sale.
Revenue (20%*100)
Cost of sales
Investment in associate (20%*25)
Reduction of group sales, cost of
sales and investment in associate
DR
I/B
I
B
DR
CR
5
5
EXAMPLE - Associates and extent of inter-group elimination
As the profit was earned by the parent, the parent’s share of
profit is eliminated.
I/B
I
I
B
EXAMPLE 4. - associates
Undertaking C is a 20% investor in an associate, undertaking D.
(see Consolidation Book 3 for accounting for associates)
During the year, undertaking C entered into the following
transactions with undertaking D:
CR
20
15
5
- sale of inventory with a cost price of £100 for £200. The stock has
not been sold by undertaking A at year end; and
- providing management services to undertaking D and invoicing
£200 for these services.
How should undertaking C account for the revenue arising from the
sale of inventory and management services?
Many of the procedures appropriate to the application of the equity
method are similar to the consolidation procedures.
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CONSOLIDATION PART 2
Unrealised profits and losses arising from downstream transactions
are eliminated to the extent that the investor is transacting with
itself. While the inventory remains on the associate’s balance sheet,
the associate will not be recording an expense in its income
statement.
Therefore a consolidation entry, reducing the revenue arising from
the sale of the inventory by £40 (£200 x 20%), is required to
eliminate the unrealised portion of the gain made in undertaking C.
The revenue arising from the management services would not be
adjusted, as the management services cost is realised in the
associate. As undertaking D is equity- accounted for, £40 (£200 x
20%) - representing the portion of the cost relating to undertaking C
- will be reflected in the consolidated financial statements of
undertaking C; no further elimination entry is therefore required.
EXAMPLE - Discontinued operations and intra-group balances
Group E plans to sell one of its subsidiaries F. F meets the criteria
in IFRS 5 to be classified as a disposal group held for sale and also
to be presented as discontinued. IFRS 5 requires that operations
classified as held for sale are measured at the lower of carrying
value and fair value less costs to sell.
The net assets of F to be sold include various trading balances with
other members of group E.
Should these intra-group balances form part of the fair value less
cost to sell of F that would be presented separately as discontinued
in the consolidated financial statements of E?
IFRS 5 does not provide guidance on the treatment of intra-group
balances within disposal groups classified as held for sale. It does
not provide any relief from the requirement to apply IFRS 10.
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Undertaking E must therefore continue to eliminate the intra-group
balances between F and the rest of the group in accordance with
the normal consolidation requirements, and present the disposal
group excluding the eliminated balances.
The net assets of F should be presented as held for sale, excluding
the intra-group balances. However, E should disclose any material
intra-group balances, currently eliminated on consolidation that will
be disposed of, and should disclose any relevant impact such
balances may have on F’s fair value less costs to sell.
4. Dividends Paid out of Pre-Acquisition Profits
‘Pre-acquisition’ dividends
During the year, a subsidiary pays a dividend to its parent in excess
of its post-acquisition reserves. The parent has early adopted the
recent amendment to IAS 27 (now IFRS 10).
How does the parent account for the dividend paid out of preacquisition profits?
Dividends paid from pre-acquisition profits of a subsidiary are now
recognised in profit or loss and are no longer recognised as a
deduction from the investment in subsidiary.
However, if there is evidence of impairment, this could trigger an
impairment test in terms of IAS 36, Impairment of Assets.
Triggers include:
a) if the carrying amount of the investment in the subsidiary
exceeds the carrying amount in the consolidated financial
statements of the subsidiary’s net assets, including the associated
goodwill; and
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CONSOLIDATION PART 2
b) if the dividend exceeds the total comprehensive income of the
subsidiary in the period the dividend is declared.
Assets
Cash
Example 4
Parent Balance Sheet (pre-acquisition)
Accounts
receivable
Investments
Investment in S
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
400 Accounts
payable
1000
200 Accruals
100 Shareholders’
Funds
Retained
Earnings
1700
800
Fixed Assets
Accounts
receivable
Investments
Fixed Assets
Liabilities
50 Accounts
payable
400
100 Share Capital
50 Retained
Earnings
600
200
300 Shareholders’
Funds
100 Retained
Earnings
1700
800
300
500
100
1700
300
500
100
S pays a dividend of 30, all out of pre-acquisition profits. The
parent in its own accounts does treats this as investment income,
but the value of S has fallen to 270.
1700
Therefore, the investment in S has been impaired and reduced in
value by 30. The impairment is recorded in the Income Statement,
eliminating the benefit of the dividend.
Subsidiary Balance Sheet (pre-acquisition)
Assets
Cash
Liabilities
100 Accounts
payable
1000 Accruals
The only benefit to the parent is that it receives 30 in cash.
300
So, in the Parent Balance Sheet the net cost of S is reduced from
300 to (300-30)=270, and cash increased from 100 to 130.
270
30
600
Subsidiary Balance Sheet(after dividend payment)
The parent buys 100% of the subsidiary for 300.
Parent Balance Sheet (post-acquisition)
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Assets
Cash
Liabilities
20 Accounts
300
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CONSOLIDATION PART 2
payable
Accounts
receivable
Investments
Fixed Assets
Accounts
receivable
Investments
400
100 Share Capital
50 Retained
Earnings
570
270
0
570
Parent Balance Sheet (after dividend received)
Assets
Cash
Accounts
receivable
Investments
Investment in S*
Fixed Assets
Liabilities
130 Accounts
payable
1000
200 Accruals
270 Shareholders’
Funds
100 Retained
Earnings**
1700
800
300
500
100
1700
* After recording an impairment of 30 (300-30)
** 100 + 30 dividends received – 30 impairment charge = 100
Consolidated Balance Sheet
Assets
Cash
Fixed Assets
Liabilities
150 Accounts
1100
payable
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1400 Accruals
300
300 Shareholders’
Funds
150 Retained
Earnings
2000
500
100
2000
Notes:
Cash= 20+130=150
Accounts receivable= 400+1000=1400
Investments= 100+200=300
Fixed Assets= 50+100=150
Accounts payable= 300+800=1100
5.
Dividends Paid out of Post-Acquisition Profits
Dividends paid out of post-acquisition profits are income in the
income statement of Parent and an expense for Subsidiary. Postacquisition profits may be considered to be group profits, as they
are made after the subsidiary becomes a member of the group.
On consolidation these cancel out (dividends received =
dividends paid).
Example 5 Minority Interest and Dividends Paid from
Pre- and Post- Acquisition Profits
Parent Balance Sheet (before acquisition of
subsidiary)
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CONSOLIDATION PART 2
Assets
Cash
Inventory
Investments
Fixed Assets
Liabilities
400 Accounts
payable
1000 Accruals
200 Share Capital
100 Retained
Earnings
1700
1700
1700
800
300
500
100
1700
Subsidiary Balance Sheet (before acquisition)
Assets
Liabilities
Cash
50 Accounts
300
payable
Inventory
400
Investments
100 Share Capital
270
Fixed Assets
50 Retained
30
Earnings
600
600
S pays a dividend of 30, all out of pre-acquisition profits.
P owns 60% of S. P receives a dividend of 18 (60% of 30), paid out
of pre-acquisition profits.
On consolidation this is treated as a return of capital (purchase
price) but in the parent balance sheet it is treated as investment
income.
So, the net investment cost of S is reduced from 300 to 282 (30018) – an impairment.
S’s retained earnings are reduced from 30 to 0.
The remaining 12 of dividend will be paid to the minority interest
and reduces the value of the minority interest in the consolidated
balance sheet.
The parent buys 60% of the subsidiary for 300 cash.
Parent Balance Sheet (after acquisition)
Liabilities
100 Accounts
800
payable
Inventory
1000
Investments
200 Accruals
300
Investment in S
300 Share Capital
500
Fixed Assets
100 Retained
100
Earnings
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Assets
Cash
Subsidiary Balance Sheet (after dividend payment)
Assets
Cash
Inventory
Investments
Liabilities
20 Accounts
payable
400
100 Share Capital
300
270
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CONSOLIDATION PART 2
Fixed Assets
50 Retained
Earnings
570
0
570
Parent Balance Sheet (after receipt of dividend)
Assets
Cash
Inventory
Investments
S investment
Fixed Assets
Liabilities
118 Accounts
payable
1000 Accruals
200 Share Capital
282
100 Retained
Earnings
1700
800
300
500
Inventory
Investments
Fixed Assets
Goodwill
Liabilities
138 Accounts
payable
1400
300 Accruals
Minority Interest
150 Share Capital
120 Retained
Earnings
2108
The subsidiary then makes a profit of 100, (post-acquisition profits)
which it pays out as a cash dividend. The parent company’s
balance sheet had not changed since receiving the first dividend.
Parent Balance Sheet
100
300
Liabilities
178 Accounts
payable
1000
200 Accruals
300
100 Share Capital
Retained
Earnings
1760
108
500
100
Notes:
Cash (plus dividend)= 118+60%(100)=178
Retained Earnings= 118+60%(100)=178
1700
Consolidated Balance Sheet
Assets
Cash
Cash= 118+20=138
Inventory= 1000+400=1400
Investments= 200+100=300
Goodwill= P has paid 300 for 60% of the assets of S
(60% of (270+30) = 180)
so goodwill= 300-180=120
Accounts payable= 800+300=1100
Minority Interest= 40%of 300 less dividend of 12= 108
1100
2108
Notes
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Assets
Cash
Inventory
Investments
S investment
Fixed Assets
800
300
500
178
1760
Subsidiary Balance Sheet (after 2nd dividend
payment- no change. All profits paid out in
dividends)
Assets
Liabilities
17
CONSOLIDATION PART 2
Cash
Inventory
Investments
Fixed Assets
20 Accounts
payable
400
100 Share Capital
50 Retained
Earnings
570
300
Example 6
Parent Balance Sheet (before acquisition)
270
0
Assets
Cash
570
The dividend of 100 of post-acquisition profits is spilt between
the parent (60) and minority interests (40).
Inventory
Investments
Fixed Assets
As it is paid in cash, no change is made to minority interests in the
consolidated balance sheet.
Consolidated Balance Sheet
Assets
Cash
Inventory
Investments
Fixed Assets
Goodwill
Liabilities
198 Accounts
payable
1400
300 Accruals
Minority Interest
150 Share Capital
120 Retained
Earnings
2168
Liabilities
300 Accounts
payable
1000
200 Accruals
100 Shareholders’
Funds
1600
800
300
500
1600
Subsidiary Balance Sheet (before acquisition)
1100
300
108
500
160
Assets
Cash
Inventory
Investments
Fixed Assets
Liabilities
20 Accounts payable
400
100
50 Shareholders’
Funds
570
300
270
570
2168
P buys 100% of S for 270 Cash.
Notes:
Retained earnings= 178-18(dividend from pre-acquisition)= 160
All post acquisition profits paid as cash dividend
6.
Intra-Group Asset Sales
Any profits or losses, on the sale of assets to other group members,
must be cancelled out on consolidation.
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P sells a fixed asset to S for cash.
Details of the asset are:
Cost 20
Net Book Value at date of sale 5
Sale Price 12 Profit=7 (12-5)
Parent Balance Sheet (after sale of asset and S
purchase)
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CONSOLIDATION PART 2
Assets
Cash
Inventory
Investments
S investment
Fixed Assets
Liabilities
42 Accounts
payable
1000
200 Accruals
270 Shareholders’
Funds
95 Profit on asset
sale
1607
Investments
800
Fixed Assets
Inventory
Investments
Fixed Assets
Liabilities
8 Accounts
payable
400
100
62 Shareholders’
Funds
570
500
0
1900
300
500
7
1607
Notes:
Cash= 300-270+12=42
Fixed Assets= 100-5=95
Subsidiary Balance Sheet (after purchase of asset)
Assets
Cash
300 Shareholders’
Funds
150 Profit
1900
Notes:
Cash= 42+8=50
Inventory= 1000+400=1400
Investments= (470-270)+100=300
Fixed Assets= 95+62-7=150
Accounts Payable= 800+300=1100
Shareholders’Funds= (507-7)+(270-270)= 500
300
270
7.
Vertically Integrated Groups
570
Notes:
Cash= 20-12=8
Fixed Assets= 50+12=62
Parent
owns 70% of S1
S1 owns 60% of S2
Consolidated Balance Sheet
Assets
Cash
Liabilities
50 Accounts
1100
payable
Inventory
1400 Accruals
300
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P owns (60% of 70%) = 42% of S2, but since P controls S1 and it in
turn controls S2, P effectively controls S2 and its results should be
consolidated with P.
19
CONSOLIDATION PART 2
So a subsidiary is consolidated if the parent holding is greater than
50%, or if the parent has effective control through a subsidiary.
Example 7
Subsidiary 2 Balance Sheet (before acquisition)
Assets
Cash
Parent Balance Sheet(before acquisition)
Assets
Cash
Inventory
Investments
Fixed Assets
Liabilities
300 Accounts
payable
1000
200 Accruals
100 Shareholders’
Funds
1600
800
Inventory
Investments
Fixed Assets
Liabilities
10 Accounts
payable
300
80
30 Shareholders’
Funds
420
300
120
420
300
500
1600
Parent buys 60% of Subsidiary 1 for 200, and pays cash.
Consolidated Balance Sheet - S1 Group
Subsidiary 1 Balance Sheet (before acquisition)
Assets
Cash
Inventory
Investments
Fixed Assets
Liabilities
120 Accounts
payable
400
100
50 Shareholders’
Funds
670
Assets
Cash
400
270
Inventory
Investments
Fixed Assets
Goodwill
670
Subsidiary 1 buys 70% of Subsidiary 2 for 100, and pays cash.
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Liabilities
30 Accounts
payable
700
180
80 Minority Interest
16 Shareholders’
Funds
1006
700
36
270
1006
Notes:
20
CONSOLIDATION PART 2
Cash= (120-100)+10=30
Inventory= 400+300=700
Investments= 100+80=180
Fixed Assets= 50+30 = 80
Goodwill= 100 – (70% of 120)=16
Accounts Payable= 400+300=700
Minority Interest = 30% of 120=36
In theory, the income statement of a 100% owned subsidiary can
be added directly to the income statement of the parent to give a
consolidated result.
In practice, there are common adjustments that need to be made to
eliminate inter-company income, expenses, profits, dividends etc.
Also, retained profits must be split into pre- and post-acquisition, as
in prior examples.
Consolidated Balance Sheet - P Group
Assets
Cash
Inventory
Investments
Fixed Assets
Goodwill
Liabilities
130 Accounts
payable
1700
380 Accruals
180 Minority Interest
54 Shareholders’
Funds
2444
1500
300
144
500
2444
Notes:
Cash= (300-200)+30=130
Inventory= 1000+700=1700
Investments= 200+180=380
Fixed Assets= 100+80
Goodwill= 38+16=54
200-(60%of 270)=38
Accounts= 800+700=1500
Minority Interest= (40% of 270)+36=144
8. Consolidated Income Statements
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CONSOLIDATION PART 2
Example 8
In the following example, Intra Group transactions need to be eliminated.
They are:
Sales / Purchases 600
Distribution recharge/distribution cost 220
Finance recharge/finance cost 60
The impact of these adjustments is to reduce sales and cost of sales. Recharges at cost have no overall impact, unless the recharge and the
cost appear on different lines in the financial statements.
If a subsidiary is sold during the period, the consolidated income statements should only include the subsidiary’s figures up to the date of
disposal.
Parent Company
Income
Statement
DR
Sales
CR
Subsidiary
Income
Statement
DR
16000
5000
Cost of Sales
7500
2400
Distribution Costs
1800
500
Administrative Expenses
3200
1000
Finance Costs
1100
800
Profit before tax
2400
300
16000 16000
CR
5000
Adjustments
DR
CR
Consolidated
Income
Statement
DR
600
220
CR
20400
600
9300
220
2300
4200
60
60
1900
2700
5000
880
880
20400
20400
.
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22
CONSOLIDATION PART 2
In the next example, the subsidiary was bought halfway through the
accounting period.
The subsidiary’s accounts cover the entire period, so the
adjustments represent the elimination of pre-acquisition profits.
No inter-company sales, nor recharges, were made.
Parent Company
Income Statement
DR
Sales
CR
Subsidiary
Income
Statement
DR
16000
CR
9000
Adjustments
Consolidated
(PreAcquisition) Income Statement
DR
CR
DR
4740
20260
Cost of Sales
7500
4300
2160
9640
Distribution Costs
1800
800
430
2170
Administrative Expenses
3200
1800
920
4080
Finance Costs
1100
700
375
1425
Profit before tax
2400
1400
855
2945
4740
20260
16000
16000
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9000
9000
4740
CR
20260
23
CONSOLIDATION PART 2
9.
Multiple Choice Questions
Choose the correct answer:
1) Not be included.
2) Include the subsidiary’s figures up to the date of disposal.
3) Show pre-disposal and post-disposal results separately.
1. In the consolidated accounts, Profit on Intra Group Asset Sales:
1) Must be capitalised and depreciated over the life of the
asset.
2) Must be shown separately.
3) Must be eliminated.
2. If a parent company has only a minority of an undertaking’s
shares, but has effective control through a subsidiary, the
correct consolidation of the undertaking treatment is:
1) Joint venture.
2) Associate.
3) Subsidiary.
3. The income statement of a 100% owned subsidiary can be
added, without adjustment, to the income statement of the
parent to give a consolidated result. This is,
1) Generally true.
2) Generally false.
4. Retained profits must be:
1) Analysed by subsidiary.
2) Split into pre- and post-acquisition profits.
5. If a subsidiary is sold during the period, the consolidated income
statements should:
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24
CONSOLIDATION PART 2
The parent buys 100% of the subsidiary. It pays 400 cash.
10.
Exercise Questions
Instructions: In each of the following examples complete the blank
boxes
with your own figures.
Then, the parent loans 200 to the subsidiary.
Parent Balance Sheet (after acquisition & loan
transaction)
1. Intra Group Trading Company: Loan from parent
Assets
Cash
Parent Balance Sheet (before acquisition)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
800 Accounts payable
600 Accruals
200 Shareholders’
Funds
100 Profit and loss
Account
1700
800
400
500
Accounts
receivable
Investments
Investment in S
Loan to subsidiary
Fixed Assets
Liabilities
200 Accounts
payable
600
200 Accruals
400
200
100 Shareholders’
Funds
1700
800
400
500
1700
1700
Subsidiary Balance Sheet (after acquisition & loan
transaction)
Subsidiary Balance Sheet (before acquisition)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
20 Accounts
payable
400
100
50 Shareholders’
Funds
570
Assets
Cash
170
Accounts
receivable
Investments
Fixed Assets
400
Liabilities
Accounts
payable
Loan from
Parent
Shareholders’
Funds
570
Group Balance Sheet
Assets
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Liabilities
25
CONSOLIDATION PART 2
Cash
Cash
Accounts
payable
Accounts
receivable
Investments
Fixed Assets
Accounts
receivable
Investments
Fixed Assets
Accruals
Shareholders’
Funds
2. Intra Group Trading: Buying an asset (investment)
20 Accounts
payable
400
100
50 Shareholders’
Funds
570
70
500
570
In this example, the subsidiary is 100% owned and cost 500
cash.
Parent Balance Sheet (before acquisition)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
The parent buys an investment security for 200 from a subsidiary
that cost 90.
Liabilities
900 Accounts payable
400
200 Accruals
100 Shareholders’
Funds
Profit and loss
Account
1600
600
So the subsidiary makes a profit of 110 but the group profit is zero
as no group profit is made until the sale is made outside the group.
300
700
No money has been transferred between the companies to
settle this transaction at the balance sheet date.
1600
Subsidiary Balance Sheet (before acquisition)
Assets
Liabilities
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26
CONSOLIDATION PART 2
Parent Balance Sheet (after acquisition and purchase
transaction)
Assets
Cash
Accounts
receivable
Investments
Investment in
Subsidiary
Fixed Assets
Liabilities
400 Accounts
payable
400
400 Accruals
500 Subsidiary
account
100 Shareholders’
Funds
1800
600
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
Accounts
payable
Accruals
Shareholders’
Funds
300
200
700
1800
Subsidiary Balance Sheet (after acquisition and
purchase)
Assets
Cash
Accounts
receivable
Investments
Parent account
Fixed Assets
Liabilities
Accounts
payable
Shareholders’
Funds
Profit
Group Balance Sheet
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27
CONSOLIDATION PART 2
3. Intra Group Trading: Buying securities more than book
value and sold outside the group at a profit.
Parent Balance Sheet (after acquisition and
purchase)
Parent Balance Sheet (before acquisition)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
900 Accounts
payable
400 Accruals
200 Shareholders’
Funds
100 Profit and loss
Account
1600
600
300
700
Accounts receivable
Investments
Fixed Assets
Liabilities
20 Accounts
payable
400
100
50 Shareholders’
Funds
570
Assets
Cash
Accounts
receivable
Investments
Investment in S
Fixed Assets
1600
Subsidiary Balance Sheet (before acquisition)
Assets
Cash
the securities to another company, outside the group, for 300
cash.
Liabilities
Accounts
payable
Accruals
Subsidiary a/c
Shareholders’
Funds
Retained
Earnings
Subsidiary Balance Sheet (after acquisition)
70
500
570
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
Accounts
payable
Shareholders’
Funds
The parent buys the subsidiary for 500.
The parent buys securities from the subsidiary for 200 that
cost 90. No cash is paid by the parent. Next the parent sold on
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Group Balance Sheet
28
CONSOLIDATION PART 2
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
Accounts
payable
Accruals
Accounts receivable
Investments
Fixed Assets
Shareholders’
Funds
Retained
Earnings
400
100 Shareholders’
Funds
50 Retained profit
600
400
100
600
The parent buys 100% of the subsidiary for 500 and S pays a
dividend of 40, all out of pre-acquisition profits.
Subsidiary Balance Sheet (after dividend payment)
4. Dividends Paid by subsidiary from Pre-Acquisition Profits
Parent Balance Sheet (before acquisition)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
600 Accounts
payable
800 Accruals
200 Shareholders’
Funds
100 Retained
Earnings
1700
800
100
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
10 Accounts
payable
400
100 Share Capital
50 Retained
Earnings
560
100
400
60
560
300
500
1700
Subsidiary Balance Sheet (before acquisition)
Assets
Cash
Liabilities
50 Accounts
payable
100
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29
CONSOLIDATION PART 2
Assets
Cash
Parent Balance Sheet (after acquisition)
Assets
Cash
Accounts
receivable
Investments
Investment in S
Fixed Assets
Liabilities
100 Accounts
payable
800
200 Accruals
500 Shareholders’
Funds
100 Retained
Earnings
1700
800
100
300
Accounts
receivable
Investments
Investment in S
Fixed Assets
Fixed Assets
Shareholders’
Funds
Retained
Earnings
500
1700
Parent Balance Sheet (after acquisition and receipt of
dividend)
Assets
Cash
Accounts
receivable
Investments
Liabilities
Accounts
payable
Accruals
Liabilities
Accounts
payable
Accruals
Dividends paid out of pre-acquisition profits are treated as
income (eliminated by an impairment charge of the same
amount, though they are a return of cash to the parent of part
of the price paid and so reduce the cash outflow.
Example 5 Dividends Paid by subsidiary from Post-Acquisition
Profits
The parent had bought 75% of the subsidiary for 700. The net
assets of the subsidiary were worth 800 at the date of
acquisition.
Shareholders’
Funds
Retained
Earnings
Parent Balance Sheet (after acquisition)
Consolidated Balance Sheet
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Assets
Liabilities
30
CONSOLIDATION PART 2
Cash
Inventory
Investments
S investment
Fixed Assets
0 Accounts
payable
1000 Accruals
100
700 Share Capital
100 Retained
Earnings
1900
800
Cash
300
Inventory
Investments
Fixed Assets
Goodwill
750
50
Accounts
payable
Accruals
Minority Interest
Share Capital
Retained
Earnings
1900
6. Intra-Group Asset Sales
Subsidiary Balance Sheet (after acquisition but
before dividend)
Assets
Cash
Inventory
Investments
Fixed Assets
Liabilities
320 Accounts payable
400
100 Share Capital
680 Post-Acquisition
profits
1500
400
800
300
1500
Parent Balance Sheet (before acquisition)
Assets
Cash
Inventory
Investments
Fixed Assets
Liabilities
300 Accounts
payable
1000
200 Accruals
100 Shareholders’
Funds
1600
800
300
500
1600
A dividend of 200 is paid entirely out of post acquisition profits.
The dividend is paid in cash and spilt between the parent
(75%) and minority interests (25%).
Post acquisition profits of 100 remain in the subsidiary, 75
attributable to the parent and 25% attributable to minority interests.
Consolidated Balance Sheet
Assets
Liabilities
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Subsidiary Balance Sheet (before acquisition)
Assets
Cash
Liabilities
80 Accounts
payable
320
31
CONSOLIDATION PART 2
Inventory
Investments
Fixed Assets
340
100
50 Shareholders’
Funds
570
Fixed Assets
250
570
The parent then sells a fixed asset to S for cash. The asset cost the
parent 30 and the Net Book Value at date of sale is10.
The asset is sold for 25 giving a profit of 15 to P.
Inventory
Investments S
Investment
Fixed Assets
Liabilities
Accounts
payable
Accruals
Inventory
Investments
Fixed Assets
Inventory
Investments
Liabilities
130 Accounts
payable
1340 Accruals
300 Shareholders’
Liabilities
Accounts
payable
Accruals
Shareholders’
Funds
Profit
7. Vertical Integration and Minority Interest
Consolidated Balance Sheet
Assets
Cash
Consolidated Balance Sheet
Assets
Cash
Shareholders’
Funds
Profit from sale
Liabilities
Accounts
payable
Inventory
Investments
Fixed Assets
Parent Balance Sheet (after sale of asset and S
purchase)
Assets
Cash
1920
Subsidiary Balance Sheet(after purchase of asset)
Assets
Cash
The Parent buys 100% of S for 250 Cash.
Funds
150 Profit
1920
Parent Balance Sheet
1120
300
500
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Assets
Cash
Inventory
Liabilities
1000 Accounts
payable
300
500
32
CONSOLIDATION PART 2
Investments
Fixed Assets
200 Accruals
100 Shareholders’
Funds
1600
300
800
Subsidiary 1 buys 80% of Subsidiary 2 for 190, and pays cash.
Subsidiary 2 Balance Sheet
1600
Assets
Cash
Parent buys 75% of Subsidiary1 for 350 cash.
Inventory
Investments
Fixed Assets
Subsidiary 1 Balance Sheet
Assets
Cash
Inventory
Investments
Fixed Assets
Liabilities
400 Accounts
payable
120
100
50 Shareholders’
Funds
670
Liabilities
10 Accounts
payable
300
80
30 Shareholders’
Funds
420
220
200
420
270
Consolidated Balance Sheet - S1 Group
400
670
Assets
Cash
Liabilities
Accounts
payable
Inventory
Investments
Fixed Assets
Goodwill
Minority Interest
Shareholders’
Funds
Consolidated Balance Sheet - P Group
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CONSOLIDATION PART 2
Assets
Cash
Inventory
Investments
Fixed Assets
Goodwill
Liabilities
Accounts
payable
Accruals
Minority Interest
Shareholders’
Funds
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34
CONSOLIDATION PART 2
8.Adjustments to the Income Statement
Intra Group transactions need to be eliminated. Only transactions outside the group should be reflected in the consolidated statement.
Group transactions are:
1. Sales by Parent to Subsidiary - 2000 on which the Parent made a profit of 500. The cost of sales was 1300 and distribution was 200.
2. Finance charges were incurred by the Parent on behalf of the Subsidiary of 200
Parent
Company
Subsidiary
Income
Statement
DR
CR
Income
Statement
DR
CR
Sales
16000
7500
1800
3200
1100
2400
500
1000
800
Profit before tax
2400
300
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
DR
CR
Income
Statement
DR
CR
5000
Cost of Sales
Distribution Costs
Administrative Expenses
Finance Costs
16000 16000
Adjustments Consolidated
5000
5000
35
CONSOLIDATION PART 2
9. Acquisition part way through the accounting period
The parent acquired the subsidiary halfway through the accounting period.
The subsidiary’s financial statements cover the entire period, so the adjustments represent the elimination of pre-acquisition profits.
Assume that exactly half of the subsidiary’s results occurred before the acquisition.
No inter-company sales, nor recharges, were made.
Parent Company Subsidiary Adjustments Consolidated
Income
Statement
DR
CR
Sales
Income
Statement
DR
CR
16000
(PreAcquisition)
DR
CR
Income
Statement
DR
CR
9000
Cost of Sales
Distribution Costs
Administrative Expenses
Finance Costs
7500
1800
3200
1100
4300
800
1800
700
Profit before tax
2400
1400
16000
16000 9000 9000
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36
CONSOLIDATION PART 2
11.
Solutions
Assets
Cash
Answers to Multiple Choice Questions:
Accounts
receivable
Investments
Fixed Assets
1. 3)
2. 3)
3. 2)
4. 2)
Liabilities
20 Accounts
payable
400
170
100
50 Shareholders’
Funds
570
400
570
5. 2)
1. Intra Group Trading Company: Loan from parent
Parent Balance Sheet (before acquisition)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Parent Balance Sheet (after acquisition & loan
transaction)
Liabilities
800 Accounts payable
600 Accruals
200 Shareholders’
Funds
100 Profit and loss
Account
1700
The parent buys 100% of the subsidiary. It pays 400 cash.
Then, the parent loans 200 to the subsidiary.
800
400
Assets
Cash
500
Accounts
receivable
Investments
Investment in S
Loan to subsidiary
Fixed Assets
1700
Subsidiary Balance Sheet (before acquisition)
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Liabilities
200 Accounts
payable
600
200 Accruals
400
200
100 Shareholders’
Funds
1700
800
400
500
1700
Subsidiary Balance Sheet (after acquisition & loan
transaction)
37
CONSOLIDATION PART 2
Assets
Cash
Liabilities
220 Accounts
payable
400 Loan from
Parent
100
50 Shareholders’
Funds
770
Accounts
receivable
Investments
Fixed Assets
170
200
Fixed Assets
Liabilities
420 Accounts payable
1000
300 Accruals
150 Shareholders’
Funds
1870
Cash (P200+S220)=420
770
970
1870
700
0
1600
Liabilities
20 Accounts
payable
400
100
50 Shareholders’
Funds
570
70
500
570
In this example, the subsidiary is 100% owned and cost 500 cash.
The parent buys an investment security for 200 from a subsidiary
that cost 90. So the subsidiary makes a profit of 110 but the group
profit is zero as no group profit is made until the sale is made
outside the group.
A/R (P600+S400)=1000
A/P (P800+S170)=970
Liabilities
900 Accounts
payable
Accounts
receivable
Investments
Fixed Assets
400
500
2. Intra Group Trading: Buying an asset (investment)
Parent Balance Sheet (before acquisition)
Assets
Cash
200 Shareholders’
Funds
100 Profit and loss
1600
300
Subsidiary Balance Sheet (before acquisition)
Assets
Cash
Investments (P200+S100)=300
FA (P100+S50)=150
400 Accruals
400
Group Balance Sheet
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Accounts
receivable
Investments
No money has been transferred between the companies to settle
this transaction at the balance sheet date.
Parent Balance Sheet (after acquisition and
purchase transaction)
600
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Assets
Liabilities
38
CONSOLIDATION PART 2
Cash
Accounts
receivable
Investments
Investment in S
Fixed Assets
400 Accounts
payable
400
400 Accruals
500 Subsidiary
account
100 Shareholders’
Funds
1800
600
300
200
700
1800
Fixed Assets
Cash (P400+S20)=420
150 Shareholders’
Funds
1670
700
1670
A/R (P400+S400)=800
Investments (P400+S10-110)=300
FA (P100+S50)=150
A/P (P600+S70)=670
Subsidiary Balance Sheet (after acquisition and
purchase transaction)
Assets
Cash
Accounts
receivable
Investments
Parent account
Fixed Assets
Liabilities
20 Accounts
payable
400
10
200 Shareholders’
Funds
50 Profit
680
70
500
110
680
Group Balance Sheet
Assets
Cash
Accounts
receivable
Investments
Liabilities
420 Accounts
payable
800
300 Accruals
670
300
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39
CONSOLIDATION PART 2
3. Intra Group Trading: Buying an asset (securities) It is
bought for more than book value and sold outside the group at
a profit.
Parent Balance Sheet (before acquisition)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
900 Accounts
payable
400 Accruals
200 Shareholders’
Funds
100 Retained
Earnings
1600
600
300
Accounts receivable
Investments
Fixed Assets
Liabilities
20 Accounts
payable
400
100
50 Shareholders’
Funds
570
Assets
Cash
Accounts
receivable
Investments
Investment in S
700
Fixed Assets
1600
Liabilities
400 Accounts
payable
400 Accruals
400 Subsidiary a/c
500 Shareholders’
Funds
100 Retained
Earnings
1800
600
0
200
300
700
1800
Cash (900-500)= 400
Investments (200+200)= 400
Investments in S (0+500)= 500
Subsidiary Balance Sheet (before acquisition)
Assets
Cash
Next the parent sold on the investments to another client, outside
the group, for 300 cash. The net profit to the group is 210 (300-90).
For consolidation all inter company transactions must be
eliminated. No profit is made until a sale is made outside the group.
Parent Balance Sheet (after acquisition and
purchase)
70
500
570
The Parent buys 100% of the Subsidiary for cash of 500.
The parent buys from a subsidiary, a security for 200 that cost 90.
No settlement takes place.
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Subsidiary Balance Sheet (after acquisition and sale)
40
CONSOLIDATION PART 2
Assets
Cash
Liabilities
20 Accounts
payable
400
Accounts
receivable
Parent a/c
Investments
200
10 Shareholders’
Funds
50 Retained
Earnings
680
Fixed Assets
Retained earnings (P700+(P300-P200)+(S200-S90))=910
70
Example 4 Dividends Paid by subsidiary from Pre-Acquisition
Profits
Parent Balance Sheet (before acquisition)
500
110
680
Investments = 100-90 = 10
Retained earnings = 0+(200-90) = 110
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Group Balance Sheet
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
720 Accounts
payable
800 Accruals
210 Shareholders’
Funds
150 Retained
Earnings
1880
200 Shareholders’
Funds
100 Retained
Earnings
1700
800
100
300
500
1700
670
Subsidiary Balance Sheet (before acquisition)
0
300
910
Assets
Cash
Accounts receivable
Investments
1880
Fixed Assets
Cash (P400+S20+P300)=720
Liabilities
600 Accounts
payable
800 Accruals
A/R (P400+S400)=800
Investments (P400-P200+S10)=210 FA (P100+S50)=150
Liabilities
50 Accounts
payable
400
100 Shareholders’
Funds
50 Retained profit
600
100
400
100
600
The parent buys 100% of the subsidiary for 500 and S pays a cash
dividend of 40, all out of pre-acquisition profits.
A/P (P600+S70)=670
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41
CONSOLIDATION PART 2
Dividends paid out of pre-acquisition profits are treated as income
though they are matched by an impairment charge. They reduce
the cash cost of the investment in the Subsidiary.
Parent Balance Sheet (after acquisition and receipt of
dividend)
Cash
Assets
Cash
Fixed Assets
Accounts
receivable
Investments
Investment in S
Fixed Assets
Liabilities
140 Accounts
payable
800
200 Accruals
460 Shareholders’
Funds
100 Retained
Earnings
1700
Accounts
receivable
Investments
800
100
300
Cash (P140+S10)=150
150 Accounts
payable
1200 Accruals
900
300 Shareholders’
Funds
150 Retained
Earnings
1800
300
100
500
1800
A/R (P800+S400)=1200
Investments (P200+S100)=300 FA (P100+S50)=150
500
A/P (P800+S100)=900
SF 500.
1700
Subsidiary Balance Sheet (after dividend payment)
Assets
Cash
Accounts
receivable
Investments
Fixed Assets
Liabilities
10 Accounts
payable
400
100 Share Capital
50 Retained
Earnings
560
100
400
60
560
Consolidated Balance Sheet
Assets
Liabilities
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42
CONSOLIDATION PART 2
Example 5 Dividends Paid by subsidiary from Post-Acquisition
Profits
The parent has bought 75% of the subsidiary for 700. The net
assets of the subsidiary were worth 800 at the date of acquisition.
Parent Balance Sheet (after acquisition but before
dividend)
Assets
Cash
Inventory
Investments
S investment
Fixed Assets
Liabilities
0 Accounts
payable
1000 Accruals
100
700 Share Capital
100 Retained
Earnings
1900
800
300
750
50
Liabilities
320 Accounts payable
400
100 Share Capital
680 Post-Acquisition
profits
1500
Parent Balance Sheet (after acquisition, after
dividend)
Assets
Cash
Inventory
Investments
S investment
Fixed Assets
1900
Subsidiary Balance Sheet (after acquisition but
before dividend)
Assets
Cash
Inventory
Investments
Fixed Assets
Post acquisition profits of 100 remain in the subsidiary, 75%
attributable to the parent and 25% attributable to minority interests.
400
800
300
Liabilities
150 Accounts
payable
1000 Accruals
100
700 Share Capital
100 Retained
Earnings
2050
800
300
750
200
2050
Subsidiary Balance Sheet (after acquisition, after
dividend)
Assets
Cash
Inventory
Investments
Fixed Assets
1500
Liabilities
120 Accounts payable
400
100 Share Capital
680 Post-Acquisition
profits
1300
400
800
100
1300
A dividend of 200 is paid entirely out of post acquisition profits.
Consolidated Balance Sheet
The dividend is paid in cash and spilt between the parent (75%)
and minority interests (25%).
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Assets
Liabilities
43
CONSOLIDATION PART 2
Cash
Inventory
Investments
Fixed Assets
Goodwill
270 Accounts
payable
1400 Accruals
200 Minority Interest
780 Share Capital
100 Retained
Earnings
2750
1200
300
225
750
275
Cash
Inventory
Investments
Fixed Assets
300 Accounts
payable
1000
200 Accruals
100 Shareholders’
Funds
1600
800
300
500
1600
2750
Cash (P0+150)+S320-200)=270 – The 200 is the dividend paid by
S and 150 is received by P.
Goodwill (75%x800)-700=100 – Calculated from Cost 700 less 75%
of the net assets of S.
Minority Interest 25%(800+100)=225 – Minority interest is
25%(Share capital + Retained Earnings- in this case, post
acquisition profits ).
Subsidiary Balance Sheet (before acquisition)
Assets
Cash
Inventory
Investments
Fixed Assets
Retained Earnings (P50+150)+(S75%x100)=275
Liabilities
80 Accounts
payable
340
100
50 Shareholders’
Funds
570
320
250
570
– Retained earning of P + only 75% of post acquisition profits of S.
The parent buys 100% of S for 250 Cash.
The parent then sells a fixed asset to S for cash.
6. Asset Sales within the Group
Parent Balance Sheet (before acquisition)
Assets
Liabilities
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The asset cost the parent 30 and the Net Book Value at date of
sale is10.
The asset is sold for 25 giving a profit of 15 to P.
Parent Balance Sheet (after sale of asset and S
purchase)
Assets
Liabilities
44
CONSOLIDATION PART 2
Cash
Inventory
Investments S
Investment
Fixed Assets
75 Accounts
payable
1000 Accruals
250
200 Shareholders’
Funds
90 Profit from sale
1615
800
Inventory
Investments
1340 Accruals
300 Shareholders’
Funds
150 Profit
1920
300
Fixed Assets
500
15
1615
Subsidiary Balance Sheet(after purchase of asset)
300
500
0
1920
Cash P75+S55=130
Fixed Assets P(100-10)+ S(75-15)=150 – Inter company profit of 15
must be eliminated
Profit – There is no profit as far as the group is concerned.
Assets
Cash
Inventory
Investments
Fixed Assets
Liabilities
55 Accounts
payable
340
100
75 Shareholders’
Funds
570
320
7. Vertical Integration and Minority Interest
Subsidiary 1 Balance Sheet
250
570
Assets
Cash
Inventory
Investments
Fixed Assets
Cash (80-25) Fixed Assets (50+25)=75
Liabilities
400 Accounts
payable
120
100
50 Shareholders’
Funds
670
270
400
670
Subsidiary 1 buys 80% of Subsidiary 2 for 190, and pays cash.
Subsidiary 2 Balance Sheet
Consolidated Balance Sheet
Assets
Cash
Liabilities
130 Accounts
payable
Assets
Cash
1120
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Inventory
Liabilities
10 Accounts
payable
300
220
45
CONSOLIDATION PART 2
Investments
Fixed Assets
80
30 Shareholders’
Funds
420
200
420
Inventory
Investments
Fixed Assets
Goodwill
Consolidated Balance Sheet - S1/S2 Group
Assets
Cash
Inventory
Investments
Fixed Assets
Goodwill
Liabilities
220 Accounts
payable
420
180
80 Minority Interest
10 Shareholders’
Funds
910
Assets
Cash
490
20
400
910
Liabilities
870 Accounts
payable
720
380 Accruals
180 Minority Interest
60 Shareholders’
Funds
2210
990
300
120
800
2210
Cash P(1000-350)+S1/S2(220)=870
Goodwill P(350-300)+ S1/S2(10)=60
Minority Interest P(25% of 400)+S1/S2(20)=120
Parent Balance Sheet
Assets
Cash
Inventory
Investments
Fixed Assets
Liabilities
1000 Accounts
payable
300
200 Accruals
100 Shareholders’
Funds
1600
500
300
800
1600
Parent buys 75% of Subsidiary 1 for 350 cash.
The P group balance sheet is constructed by combining the P
balance sheet with that of the S1/S2 group
Consolidated Balance Sheet - P Group
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46
CONSOLIDATION PART 2
8.Adjustments to the Income Statement
Intra Group transactions need to be eliminated. Only transactions outside the group should be reflected in the consolidated statement.
In this example the Parent owns 100% of Subsidiary
Group transactions are:
3. 1. Sales by Parent to Subsidiary - 2000 on which the Parent made a profit of 500. The cost of sales was 1300 and distribution was 200.
The goods are unsold by the subsidiary at the reporting date.
2. Finance charges were incurred by the Parent on behalf of the Subsidiary of 200. As there is no net effect to the group, no entry is made
for these finance charges.
In addition to the adjustments to the income statement,
In the group balance sheet would require that the inventory value is reduced by 500 for unrealised profit.
Required: Complete the Adjustment and Consolidated columns
Parent
Company
Subsidiary
Income
Statement
DR
CR
Income
Statement
DR
CR
Sales
I
16000
5000
Adjustments Consolidated
DR
CR
Income
Statement
DR
CR
2000
19000
Cost of Sales
Distribution Costs
Administrative Expenses
Finance Costs
7500
1800
3200
1100
2400
500
1000
800
1300
200
8600
2100
4200
1900
Profit before tax
2400
300
500
2200
2000 2000
19000
16000 16000
5000
5000
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19000
CONSOLIDATION PART 2
9. Acquisition part way through the accounting period
Note: Material from the following PricewaterhouseCoopers
publications has been used in this workbook:
The parent acquired the subsidiary halfway through the
accounting period.
The subsidiary’s financial statements cover the entire period,
so the adjustments represent the elimination of pre-acquisition
profits.
-Applying IFRS
-IFRS News
-Accounting Solutions
No inter-company sales, nor recharges, were made.
Required: Complete the Adjustment and Consolidated columns
Parent Company Subsidiary Adjustments Consolidated
Income
Statement
DR
CR
Sales
Income
Statement
DR
CR
16000
9000
(PreAcquisition)
DR
CR
Income
Statement
DR
CR
4500
20500
Cost of Sales
Distribution Costs
Administrative Expenses
Finance Costs
7500
1800
3200
1100
4300
800
1800
700
2150
400
900
350
9650
2200
4100
1450
Profit before tax
2400
1400
700
3100
16000
16000 9000 9000
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4500 4500 20500 20500
48