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Chapter 9

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The consolidated statement of financial position

Contents
1. IAS summary of consolidation procedures 2. Non-controlling interest 3. Dividends paid by a subsidiary

4. Goodwill arising on consolidation


5. A technique of consolidation

6. Intra-group trading
7. Intra-group sales of non-current assets

Contents
8. Summaryconsolidated statement of financial position

9. Acquisition of a subsidiary during its accounting period

10. Dividends and pre-acquisition profits 11. Fair values in acquisition accounting

IAS summary of consolidation procedures

Accounting standards: IAS 27 Basic procedure


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

IAS summary of consolidation procedures

Cancellation and part cancellation


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

Items requires cancellation:


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

IAS summary of consolidation procedures

Part cancellation An item may appear in the statements of financial position of a parent company and its subsidiary, but not at the same amounts The remaining un-cancelled will appear in the consolidated statements of financial position

Goodwill arising from consolidation

Non-controlling interest
Non-controlling interest can be valued at: (a) Share of net assets; or (b) Fair value (per IFRS 3 revised) Fair value can be based on MV of shares, or you may be given the FV. Valuation of the NCI will affect the goodwill calculation

Non-controlling interest

Procedure
(a) Aggregate the assets and liabilities in the statement of financial position is 100%p+100%s irrespectively of how much actually own
This shows that the amount of net assets controlled by the group.

(b) Share capital in that of the parent only (c) Calculate the non-controlling interest share of the subsidiarys net assets (d) Balance of subsidiarys reserves are consolidated

Goodwill arising from consolidation Goodwill represents the difference between


the amount paid to acquire the net assets of a subsidiary and the fair value of those net assets. It may be positive or negative. difference between the consideration transferred plus the non-controlling interest and the fair value of the identifiable assets and liabilities acquired.

Goodwill arising on consolidation is the

Goodwill arising from consolidation Goodwill Consideration transferred Non-controlling interest Less: Net fair value of identifiable assets, liabilities and contingent liabilities

X X

(X) X

Goodwill arising from consolidation


NCI Group

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

Goodwill arising from consolidation


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

75,000 45,000 120,000

Goodwill arising from consolidation


Example: Goodwill and pre-acquisition profits
WING CO STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH

Current assets Equity 50,000 ordinary shares of 1 each Retained earnings 50,000 10,000 60,000 60,000

Goodwill arising from consolidation Solution The technique to adopt here is to produce a new working
Goodwill . A formula is working out below.

Good will
Consideration transferred Non-controlling interest at acquisition Net assets acquired as represented by : Ordinary share capital Share premium

X X X

X X X
(X)
X

Retained earnings on acquisition

Goodwill arising from consolidation

Solution:
Goodwill
Applying this to our example will look like this Consideration transferred Non-controlling interest at acquisition Net assets acquired as represented by : Ordinary share capital Retained earnings on acquisition

80,000 80,000

50,000 10,000 (60,000) 20,000

Goodwill arising from consolidation

Solution:
Goodwill
SING CO CONSOLIDATED FINANCIAL STATEMENT OF FINANCIAL POSITION Assets Non-current assets Goodwill arising on consolidation Current assets Equity Ordinary shares Retained earnings

20,000 100,000 120,000


75,000 45,000

Goodwill arising from consolidation Goodwill NCI at fair value


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

Goodwill arising from consolidation


Example:
P acquired 75% of the shares in S on 1 January 2007 when S had trained earnings of 15,000. The market share price of Ss shares just before the date of acquisition was 1.60. P values non-controlling interest at fair value. Good will is not impaired. The statements of financial position of P and S are as follows:

P()
Property, plant and equipment Shares in S Current assets 60,000 68,000 128,000 52,000 180,000 Share capital -1shares Retained earnings 100,000 70,000 170,000 Current liabilities 10,000 180,000

S()

50,000 50,000

35,000
85,000 50,000 25,000 75,000 10,000 85,000

Goodwill arising from consolidation


Solution
CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Assets Property, plant and equipment

110,000 23,000 87,000 220,000 100,000 77,500 177,500 22,500 200,000

Goodwill(w1)
Current assets(52,000+35,000) Total assets Equity and liabilities

Equity attributable to the owners of p


Share capital Retained earnings(W2)

Non-current assets
Total equity Current liabilities(10,000+10,000)

20,000 220,000

Goodwill arising from consolidation

Solution:
Workings

1.Goodwill
Consideration transferred Non-controlling interest at acquisition (12,500 shares @1.60) Net assets of S at acquisition(50,000+15,000) Goodwill (parent and non-controlling interest)

68,000 20,000 (65,000) 23,000

Non-controlling interest at fair value (as above)

20,000 (16,250) 3,750

Non-controlling share of net assets at acquisition


Goodwill attributable to non-controlling interest

Goodwill arising from consolidation

Solution:
2.Retained earnings
Per statement of financial position Less pre-acquisition 7,500 P() S()

70,000

25,000
(15,000) 10,000

Group share of S (10,00025%)

Group retained earnings

77,500
18,750 3,750 22,500

3.Non-controlling interest at year end


Share of net assets of S(75,00025%)

Goodwill(W1)

Goodwill arising from consolidation Impairment of goodwill Impairment tests are conducted at least at each year end. Any resulting impairment loss is first recognised against consolidated goodwill.

A technique of consolidation

Aggregate the assets and liabilities


Calculate retained earnings Calculate non-controlling interest

Cancel common items

Calculate goodwill

A technique of consolidation
Example
The draft statement of financial position of Ping Co and Pong Co June 204 were as follows PING CO STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 204 Assets Non-current assets Property, plant and equipment 50,000

20,000 ordinary shares in Pong Co at cost

30,000
80,000

Current assets Inventory 3,000

Receivables
Cash

16,000
2,000 21,000 101,000

Total assets

A technique of consolidation
Example
Equity

Ordinary shares of 1 each


Revaluation surplus Retained earnings

45,000
12,000 26,000 83,000

Current liabilities Owed to Pong Co Trade payables


8,000 10,000

18,000

Total equity and liabilities

101,000

A technique of consolidation
Example
PING CO STATEMENT OF FINANCIAL POSITION AS AT JUNE 2004 Assets Property, plant and equipment Current assets Inventory Owed by Ping Co Receivables

40,000
8,000 10,000 7,000

25,000
Total assets Equity Ordinary shares of 1 each Revaluation surplus Retained earnings Current liabilities Owed to Pong Co Trade payables Total equity and liabilities

65,000 25,000 5,000 28,000 58,000 70,000 65,000

A technique of consolidation
Solution:
1. Agree current accounts

Ping Co has goods in transit of 2,000making its total inventory 3,000+ 2,000= 5,000and its liability to Pong Co 8,000+ 2,000= 10,000
Cancel common items: these are the current accounts between the two companies of 10,000 2. Calculate goodwill Goodwill Consideration transferred Non-controlling interest(w3) Net assets acquired as represented by: Ordinary shares capital Revaluation surplus on acquisition Retained earnings on acquisition 25,000

30,000
7,200 37,200

5,000
6,000 (36,000) 1,200

Goodwill

A technique of consolidation
Solution:
3.Calculate non-controlling interest (a) At acquisition Pong Cos net assets(w2) 20% (b) At year end

36,000 7,200

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


20% 4. Calculate consolidated reserves

58,000
11,600

Consolidated revaluation surplus Ping Co Share of Pong Cos post acquisition revaluation surplus

12,000
-12,000

A technique of consolidation
Solution:
Consolidated retained earnings Ping $ 26,000 Pong $ 28,000

Retained earnings per question


Less pre-acquisition

(6,000)
22,000

Share of Pong: 80%$22,000

17,600

43,600 5.Prepare the consolidated statement of financial position


PING CO CONSOLIDATED STATEMENT OF FIANNCIAL POSITION AS AT 30 JUNE 204 Assets Non-current assets Property, plant and equipment ($50,000+$40,000) 90,000 $ $

A technique of consolidation
Solution:
Intangible asset: goodwill Current assets Inventories($5,000+$40,000) Receivables($16,000+$7,000) Cash 13,000 23,000 2,000 38,000 Total assets Equity Ordinary shares of 1 each Revaluation surplus Retained earnings 129,200 $ $ 1,200

45,000 12,000 43,600

100,600

Non-controlling interest

11,600
112,200

Current liabilities Tradepayables($10,000+$7,000)

17,000 129,200

Total equity and liabilities

Intra-group trading
Unrealized profit
aAlthough A company makes a profit when it sells goods to B, the group doesnt make a sale until an outside customer buys the goods from B (b) Any purchases from A Co, which remain unsold by B Co will be included in Bs inventory.
Cost External sales Closing inventory at cost Profit / Loss X

Nil
X nil

An adjustment
DEBIT Group retained earnings

CREDIT Group inventory (statement of financial position)

Intra-group trading
Non-controlling interest in unrealized intra-group profits

Remove only the groups shares of the profit loading

Remove the whole Remove the whole profit without charging the nonprofit loading controlling interest ,charging the non- (to reduce group controlling interest retained earnings with their proportion by the whole profit loading)

Three possibilities as regards the treatment of intra-group profits

Intra-group trading
Entries to learn
1 DEBIT Group retained earnings 2 DEBIT 3 CREDIT

Noncontrolling interest

Group inventory (statement of financial position)

Intra-group sales of non-current assets

Consolidation adjustments

To alter retained earnings and accumulated depreciation so that consolidated depreciation is based on the cost to the group

To alter retained earnings and noncurrent assets cost so as to remove any element of unrealized profit or loss.

Intra-group sales of non-current assets

The double entry is as follows: (a) Sale by parent


DEBT CREDIT Group retained earnings Non-current assets

with the profit on disposal, less the additional depreciation

(b) Sale by subsidiary


DEBIT Group retained earnings DEBIT Non-controlling interest CREDIT Non-current assets
with the profit on disposal, less the additional depreciation

Summary: consolidated statement of financial position


Purpose Net assets To show the net assets with P controls and the ownership of those assets Always 100%P plus 100%S providing P holds a majority of voting rights

Share capital
Reason Retained earnings Reason

P only
Simply reporting to the parent companys shareholders in another form 100%P plus group share of post-acquisition retained earnings of S less consolidation adjustments To show the extent to which the group actually owns total assets less liabilities

Non-controlling interest
Reason

NIC shares of Ss consolidated net assets, or valuation at fair value


To show the entity in a subsidiary not attributable to the parent

Acquisition of a subsidiary during its accounting

Profits and before acquisition Necessary to distinguish Profits and after acquisition

Dividends and pre-acquisition profits


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

Fair value in acquisition accounting

Goodwill.

Any excess consideration transferred over the acquirers interest in the fair value of the identifiable assets and liabilities acquired as at the date of the exchange transaction could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction.

Fair value .The amount for which an asset

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

Fair value in acquisition accounting


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

Fair value in acquisition accounting Cost of business combination


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

Approach to the consolidated SFP Step Step Step Step Step Step Step Step 1 2 3 4 5 6 7 8 Group structure Proforma Assets & liabilities Adjustments Goodwill Investment in associate Non-controlling interest Retained earnings

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