ACC711: ADVANCED ACCOUNTING PRACTICE & REPORTING II

Tutorial 4: Accounting for Group Structures

1. What is the role of consolidated financial statements?
The purpose of providing consolidated financial statements is to show the results and
financial position of a group of organisations as if they are operating as a single economic
entity. The ‘group’ will comprise the parent entity and all of its subsidiaries.

2. When we are preparing consolidated financial statements, do we make consolidation

adjustments and eliminations directly to the parent entity’s and/or the subsidiaries’
accounts? Why?
When preparing consolidated financial statements we do not make consolidation adjustments
and eliminations directly to the parent entity’s and/or the subsidiaries’ accounts. Rather,
consolidation adjustments and eliminations are made outside of their individual ledgers. The
consolidation journal entries are written into a consolidation journal and are then typically
posted to a consolidation worksheet. A new worksheet is prepared each time consolidated
financial statements are required. The consolidation worksheet provides the numbers that are
used directly to construct the consolidated financial statements.

The reason that we do not make adjustments directly to the accounts of the separate legal
entities is that these entities will be required to produce their own individual financial
statements that represent their operations and financial position as separate legal entities.
Different stakeholders will have claims or interests in these separate legal entities, hence it
would be inappropriate to adjust the accounts of the separate entities directly

3. The consolidated statement of financial position will show the total assets controlled by the
economic entity (group) and the total liabilities owed to parties outside the economic entity.
As such, will liabilities owing to, and amounts receivable from, organisations within the
group (that is, within the economic entity) be eliminated in the consolidation process, and not
be shown in the consolidated statement of financial position? Why?
All liabilities owing to, and amounts receivable from, organisations within the group (that is,
within the economic entity) will be eliminated in the consolidation process, and will not be
shown in the consolidated statement of financial position. The reason for this is that the
consolidated financial statements are produced so as to show the results and financial
position of a group of organisations as if they are operating as a single economic entity.

4. There is one asset that appears in the consolidated statement of financial position, but
probably does not appear in the parent entity’s or subsidiaries’ separate accounts, and there is
also one asset that will appear in the statement of financial position of the parent entity, but
will not appear in the consolidated financial statements. Which accounts would these be?
 Goodwill will be recognised in the consolidated financial statements but will not appear
in the separate financial statements of the parent entity or subsidiary.

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  Investment in the subsidiary is eliminated as part of the consolidation process, it is an
account that will appear in the statement of financial position of the parent entity, but it
will not appear in the consolidated financial statements.

5. On consolidation, how is the goodwill on acquisition or the bargain gain on purchase

determined?
We eliminate the investment in the controlled entity (the subsidiary) against the parent
entity’s interest in the pre-acquisition shareholders’ funds of that subsidiary. Specifically,
paragraph B86 (b) of AASB 10 states:

Consolidated financial statements: offset (eliminate) the carrying amount of the parent’s
investment in each subsidiary and the parent’s portion of equity of each subsidiary.

6. What is the rationale for including the post-acquisition movements in retained earnings and
other reserves of a subsidiary in the consolidated financial statements?
Post-acquisition earnings of the subsidiary are considered to be part of the earnings of the
economic entity and therefore should be included in consolidated retained earnings.
Similarly, post-acquisition movements in other reserves, such as the revaluation surplus, are
to be included in consolidated equity.

7. When we are preparing consolidated financial statements, why don’t we make any of the
consolidation adjustments in the ledger accounts of the subsidiaries or the parent entity?
 Each separate entity must be accounted for separately and treated as a distinct entity. It
would be inappropriate to eliminate investments in other entities, inter-entity receivables
and payables, the effects of inter-entity transactions, and so forth within the individual
accounts of the separate legal entities.
 Consolidation adjustments are to be made only when we are combining the separate
accounts to produce a consolidated set of financial statements for the economic entity and
these adjustments are not to impact the financial statements of the separate legal entities.

8. According to AASB 3, how should a bargain gain on purchase arising on consolidation be

treated?
AASB 3, paragraph 36, requires that:
Before recognising a gain on a bargain purchase, the acquirer shall reassess whether it has
correctly identified all of the assets acquired and all of the liabilities assumed and shall
recognise any additional assets or liabilities that are identified in that review. The acquirer
shall then review the procedures used to measure the amounts this Standard requires to be
recognised at the acquisition date for all of the following:
(a) The identifiable assets acquired and liabilities assumed;
(b) The non-controlling interest in the acquiree, if any;
(c) For a business combination achieved in stages, the acquirer’s previously held equity
interest in the acquiree; and
(d) The consideration transferred.

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 The objective of the review is to ensure that the measurements appropriately reflect
consideration of all available information as of the acquisition date.

9. Biggin Ltd acquires 100 per cent of the shares of Smallin Ltd on 1 July 2018 for a
consideration of $730,000. The share capital and reserves of Smallin Ltd at the date of
acquisition are:

There are no transactions between the entities and all assets are fairly valued at the date of
acquisition. The financial statements of Biggin Ltd and Smallin Ltd at 30 June 2019 (one
year after acquisition) are:

REQUIRED
Prepare the consolidated financial statements for Biggin Ltd and Smallin Ltd as at 30 June
2019.

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 Statement of profit or loss and other comprehensive income together with reconciliation of opening
and closing retained earnings
Biggin Ltd Smallin Elimination and Consolidated
Ltd adjustments statement
Dr Cr
Profit before tax $300,000 $100,000 $400,000
Tax ($100,000) ($30,000) ($130,000)
Profit after tax $200,000 $70,000 $270,000
Retained earnings at 1 July 2018 $200,000 $100,000 $100,000 $200,000
Statement of financial position
Shareholders’ equity
Retained earnings at 30 June 2019 $400,000 $170,000 $470,000
Share capital $1,000,000 $200,000 $200,000 $1,000,000
Revaluation surplus $300,000 $200,000 $150,000 $350,000
Current liabilities
Accounts payable $60,000 $40,000 $100,000
Non-current liabilities
Loans $600,000 $250,000 $850,000
$2,360,000 $860,000 $2,770,000
Current assets
Cash $80,000 $45,000 $125,000
Accounts receivable $350,000 $95,000 $445,000
Non-current assets
Land $200,000 $120,000 $320,000
Plant $1,000,000 $600,000 $1,600,00
Investment in Smallin Ltd $730,000 $730,000
Goodwill $280,000 $280,000
$2,360,000 $860,000 $730,000 $730,000 $2,770,000

Consolidation adjustments
1 Share Capital Dr $200,000
Retained earnings Dr $100,000
Revaluation Surplus Dr $150,000
Goodwill Dr $280,000
Investment in Smallin Ltd Cr $730,000

It is assumed that there were no impairment losses in relation to goodwill. Remember that
there is a general prohibition on the amortisation of goodwill, and goodwill balances will be
adjusted only as a result of the recognition of an impairment loss (which occurs where the
carrying value of the asset exceeds its recoverable amount).

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10. On 1 July 2016, Jackson Ltd acquired all the issued shares (cum div.) of Laurie Ltd for
$240,000. At that date the financial statements of Laurie Ltd showed the following
information:

Share capital $100,000

General reserve $50,000
Retained earnings $70,000
Dividend payable $20,000

All the assets and liabilities of Jackson Ltd were recorded at amounts equal to their fair
values at that date.
The dividend payable reported at 1 July 2016 by Laurie Ltd was paid on 15 August 2016.
Laurie Ltd paid a $25,000 dividend on 2 February 2017.

Required
A. Prepare the consolidation worksheet entries at 1 July 2016.
Acquisition Analysis

As at 1 July 2016:
Net Fair Value of identifiable assets and liabilities
acquired = $100,000 + $50,000 + $70,000
= $220,000
Consideration transferred = $240,000 - $20,000
= $220,000
Goodwill = $0

Worksheet entries at 1 July 2016

Retained earnings (1/7/16) Dr $70,000
Share Capital Dr $100,000
General Reserve Dr $50,000
Shares in Laurie Ltd Cr $220,000

Dividend Payable Dr $20,000

Dividend Receivable Cr $20,000

B. Prepare the consolidation worksheet entries at 30 June 2017.

Worksheet entries at 30 June 2017
Retained earnings Dr $70,000
Share Capital Dr $100,000
General Reserve Dr $50,000
Shares in Laurie Ltd Cr $220,000

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 C. What differences would occur in the entries in A and B above if the shares were bought
on an ex div. basis?
Acquisition Analysis

As at 1 July 2016:
Net Fair Value of identifiable assets and liabilities
acquired = $100,000 + $50,000 + $70,000 (Equity)
= $220,000
Consideration transferred = $240,000
Goodwill = $20,000

The worksheet entries at 1 July 2016 and 30 June 2017 are the same

1 Business combination valuation entries

Goodwill Dr $20,000
Business combination valuation reserve Cr $20,000

2 Pre-acquisition entries
Retained earnings (1/7/16) Dr $70,000
Share Capital Dr $100,000
General Reserve Dr $50,000
Business combination valuation reserve Dr $20,000
Shares in Laurie Ltd Cr $240,000

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