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    Preparing Consolidated Financial Statements

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    ayyazm
    IAS 27 defines a subsidiary as an entity controlled by another through the ability to direct its operating and financial policies for economic benefit. When preparing consolidated financial statements, the cost of an investment is replaced with the fair value of assets and liabilities acquired, which can result in goodwill. Pre-acquisition reserves exist before an acquisition and are included in goodwill, while post-acquisition reserves can be included in consolidated statements. Intra-group activities like trading between entities must be eliminated in consolidation.

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    Preparing Consolidated Financial Statements

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    ayyazm
    35 views2 pages
    IAS 27 defines a subsidiary as an entity controlled by another through the ability to direct its operating and financial policies for economic benefit. When preparing consolidated financial statements, the cost of an investment is replaced with the fair value of assets and liabilities acquired, which can result in goodwill. Pre-acquisition reserves exist before an acquisition and are included in goodwill, while post-acquisition reserves can be included in consolidated statements. Intra-group activities like trading between entities must be eliminated in consolidation.

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    financial statements conolidation

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    Consolidation

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    IAS 27 defines a subsidiary as an entity controlled by another through the ability to direct its operating and financial policies for economic benefit. When preparing consolidated financial statements, the cost of an investment is replaced with the fair value of assets and liabilities acquired, which can result in goodwill. Pre-acquisition reserves exist before an acquisition and are included in goodwill, while post-acquisition reserves can be included in consolidated statements. Intra-group activities like trading between entities must be eliminated in consolidation.

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    35 views2 pages

    Preparing Consolidated Financial Statements

    Uploaded by

    ayyazm
    IAS 27 defines a subsidiary as an entity controlled by another through the ability to direct its operating and financial policies for economic benefit. When preparing consolidated financial statements, the cost of an investment is replaced with the fair value of assets and liabilities acquired, which can result in goodwill. Pre-acquisition reserves exist before an acquisition and are included in goodwill, while post-acquisition reserves can be included in consolidated statements. Intra-group activities like trading between entities must be eliminated in consolidation.

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    Preparing consolidated financial statements

    IAS 27 Consolidated and separate financial statements


    defines a subsidiary as an entity that is controlled by
    another entity. An entity has control if it has the ability to
    direct the operating and financial policies of another with a
    view to gaining economic benefit. If an entity owns 100% of
    another entity it will usually have control.
    When preparing consolidated financial statements:
    1.
    2.
    3.

    We are replacing the cost of the investment in the holding entitys accounts with the
    fair value of the assets and liabilities of the subsidiary.
    Goodwill is likely to arise on acquisition. Shares purchased at the market price may not
    reflect the fair value of the assets and liabilities of the subsidiary. Any difference
    between the amount paid and the value of the assets is goodwill.
    There must be no double counting. All items that relate to transfers within the group
    must be eliminated on consolidation.

    Pre-acquisition and post-acquisition reserves


    When preparing consolidated financial statements it is
    important to distinguish between pre-acquisition reserves
    and post-acquisition reserves. Pre-acquisition reserves are
    retained profits and other reserves that exist in a
    subsidiarys statement of financial position at the date of
    acquisition. Pre-acquisition reserves are capitalised at the
    date of acquisition by including in the goodwill calculation.
    They must not be included in the consolidated income
    statement or consolidated statement of financial position.
    Profits/losses (including unrealised gains and losses) made
    after acquisition that are shown in the subsidiary reserves
    can be included in the consolidated statement of
    comprehensive income and in reserves in the consolidated
    statement of financial position.
    Intra-group activities
    The impact of any intra-group activities must be cancelled
    out in the consolidated financial statements.
    1.
    2.
    3.

    Inter-entity trading. Sales and purchases figures need to be adjusted on the income
    statement to remove double counting of the sales. Any goods in closing inventory at
    the year end will include unrealised profit in the inventory value, this must be removed.
    Current accounts should be reconciled, making adjustments for any items in transit
    and then cancelled out on consolidation.
    Intra/inter-group dividends received are cancelled on consolidation against dividends
    paid.

    Consolidated financial statements use the same underlying


    format as single entity financial statements, so you do not
    need to learn new formats for consolidated financial
    statements.
    Consolidated financial statement preparation checklist

    1.
    2.
    3.
    4.
    5.
    6.
    7.

    Calculate group holdings and establish the status of each entity in the question
    (subsidiary, associate or investment), W1
    Establish fair value of assets acquired and calculate net assets of the subsidiary, W2
    Calculate goodwill arising on acquisition, W3
    Adjust for any intra-group activities, W4
    Calculate balance carried forward on consolidated retained earnings, W5
    Calculate balance carried forward on consolidated reserves, W6
    Prepare consolidated financial statements, statement of financial position and/or
    consolidated statement of comprehensive income.

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