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FAC2602 - Uni 1.5

The document outlines the process of drafting a consolidated statement of financial position for A Ltd Group as of February 28, 20.9, following IFRS requirements. It details the elimination of investments and owner's equity at acquisition, the treatment of profits from subsidiaries, and the necessity of eliminating intragroup transactions during consolidation. Additionally, it emphasizes the importance of preparing various consolidated financial statements and pro forma journal entries for consolidation purposes.

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8 views3 pages

FAC2602 - Uni 1.5

The document outlines the process of drafting a consolidated statement of financial position for A Ltd Group as of February 28, 20.9, following IFRS requirements. It details the elimination of investments and owner's equity at acquisition, the treatment of profits from subsidiaries, and the necessity of eliminating intragroup transactions during consolidation. Additionally, it emphasizes the importance of preparing various consolidated financial statements and pro forma journal entries for consolidation purposes.

Uploaded by

Baldwin Monyane
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© © All Rights Reserved
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EXAMPLE 2

The following example illustrates the elimination of investment in the parent's records a few
years after acquisition:

STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.9

REQUIRED

Draft the consolidated statement of financial position of the A Ltd Group at 28 February 20.9
in compliance with the requirements of IFRS. Assume that A Ltd acquired its interest on 28
February 20.5 when B Ltd was incorporated.

ASSETS

A Ltd B Ltd
Investment in B Ltd - at fair value (cost price: R10 000) 10 000 -
Trade and other receivables 12 000 8 000
Cash and cash equivalents 14 000 10 000
Total 36 000 18 000

EQUITY AND LIABILITIES

Item A Ltd B Ltd


Share capital - ordinary shares (20 000/10 000 shares) 20 000 10 000
Retained earnings 16 000 8 000
Total 36 000 18 000

SOLUTION 2

Pro forma consolidated journal entry:

 Share capital of B Ltd


 Investment in B Ltd
 Elimination of owner's equity of B Ltd at acquisition

A LTD GROUP

Dr R 10 000

Consolidated statement of financial position as at 28 February 20.9

ASSETS

 Current assets
 Trade and other receivables (12 000 + 8 000)
 Cash and cash equivalents (14 000 + 10 000)
Total assets: R 44 000

EQUITY AND LIABILITIES

 Total equity
 Share capital: R 20 000
 Retained earnings (16 000 + 8 000): R 24 000

Total equity and liabilities: R 44 000

With reference to the previous two examples, we can deduce the following:

 The journal entry for the elimination of the investment and the owner's equity at the
date of acquisition will remain unchanged from one year to the next.
 The share capital on the consolidated statement of financial position is always only
that of the parent.
 The profits the subsidiary made after the date of acquisition become part of the
retained earnings of the group and are shown as such in the consolidated statements.
 The profits the subsidiary made before the date of acquisition cannot form part of the
retained earnings of the group.
 Since the parent obtained its interest in the subsidiary at the date of incorporation,
there could not have been any retained earnings in the records of B Ltd.

2.2.2 Eliminating intragroup items

It is common practice for companies in the same group to sell inventories and assets to one
another. The following schematic representation is an example of this:

 A Ltd sells machine


 A Ltd sells timber
 B Ltd sells timber to the public
 B Ltd sells wooden wagons to the public

The actual profit the group made from the sale of goods was the profit made from sales to the
public only, since all the other sales took place within the group. Sales within a group are
known as intragroup sales and therefore have to be eliminated during consolidations.

A Ltd may lend a sum of money or sell an asset to B Ltd. We also have to eliminate these
transactions. In learning unit 7, we will study intragroup transactions in detail.

2.2.3 Consolidating remaining items

Once we have eliminated all common and intragroup items, we can draw up the consolidated
statement of financial position, the consolidated statement of profit or loss and other
comprehensive income, the consolidated statement of changes in equity, and the consolidated
statement of cash flows.

In this module, we expect you to be able to do all relevant pro forma consolidation journal
entries for consolidation purposes and to draft the consolidated statement of financial
position, consolidated statement of profit or loss and other comprehensive income, and
consolidated statement of changes in equity.

2.3 CONSOLIDATION OF THE STATEMENT OF FINANCIAL POSITION


OF A WHOLLY OWNED SUBSIDIARY AT THE DATE OF
ACQUISITION

We account for all business combinations using the

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