CHAPTER 5

CONSOLIDATED
FINANCIAL
STATEMENTS
Consolidated Financial Statements
why?
Provide information about economic entity
Investors need information about all assets
and liabilities of a combined entity
Definition of asset based on control
With control, entity can dictate use or settlement
Control through an entity is indirect control
Ex: CBE’s control Over Commercial Nominees P.L.C (CN)
Do not want legal form to dictate financial
reporting (substance over form)
 REQUIREMENT
• Uniform/same Accounting Period
• If d/t reporting date, either the subsidiary is
requested to prepare f/s same to the parent
co or the CFS will be prepared using even
though the dates are not same provided that
the gap b/n the reporting dates are not more
than 3 months.
• Uniform Accounting Policy
• IF NOT, Adjustments (Reconciliations)
Required!!!
• Presentation currency –same currency
 Exemption from preparing
group accounts
• Exemption is allowed if and only if all of the following hold:

a) The parent is itself a wholly-owned sub. or it is a partially

owned sub. of another entity & its other owners, have been
informed about, and do not object to, the parent not presenting
CFS.
b) Its securities are not publicly traded.

c) It is not in the process of issuing securities in public

securities markets.

d) The ultimate or intermediate parent publishes CFSs that

comply with IFRS.
 Content of group accounts
• The F/S of a parent and its Subs. are
combined on a line-by-line basis by adding
together like items of assets, liabs, equity,
income and expense.
• The whole of the assets and liabilities of
each Co. are included, even though some
subsidiary may be only partly owned.
– The 'equity and liabilities' section of the SOFP
will indicate:
• how much of the NA are attributable to the group and
• how much to outside investors, minorities (NCI).
Content of Group Accounts …
• Non-Control Interest (NCI) should be
presented in the CSoFP within equity,
separately from the parent shareholders'
equity.
• Most parent companies present
both
– their own individual accounts (Separate FS) &
– their group accounts (CFS) in a single package.
– EX: See CBE’s CFS of 2013/14
 Statement of Changes in Equity

17
 IAS 27 – Separate Financial Statements
• Parent Co. exempt from preparing consolidated
financial statements may prepare separate FS as its only FS
• Other parent entities prepare separate FS in addition to consolidated
ones
• Entity that presents separate financial statements
for its investments in
• subsidiaries
• jointly controlled entities
• associates
Recognizes dividends from them in profit or loss when rights to
dividend are established
• Account for these investments in separate statements
– Amortized Cost less impairment;
– Fair value; 18

– Equity method
• Choose same accounting for all investments in each category
5.1 Consolidated SOFP
The F/S of a parent and its subsidiaries are combined
on a line-by-line basis by adding together like items.
The cons. f/s should show financial information
about the group as if it was a single entity.
Basic procedure
(a) Eliminate parent's investment in each subsidiary & the
parent‘s portion of equity of each subsidiary are
eliminated.
(b) NCI in the NI of subsidiaries are adjusted against group
income, to arrive at the NI attributable to the owners of the
parent
(c) NCI in the NAs of consolidated subsidiaries should be
presented separately in the consolidated SOFP
1. Summary of Consolidation Procedure

Chapter 5
 2. Non-controlling Interests
NCI can be valued @:

(a)Proportionate share of the FV of the sub's

NA or

(b) Full (or fair) value (usually based on the MV of the shares of NCI)

Example: NCI
P Co has owned 75% of the share capital of S
Co since S Co's incorporation. Their latest
SOFP are given next.
 STATEMENT OF FINANCIAL POSITION
P Co S Co
$ $
Assets
Non-current assets
Property, plant and equipment 50,000 35,000
30,000 $1 ordinary shares in S Co 30,000
80,000
Current assets 45,000 35,000
Total assets 125,000 70,000
Equity and liabilities
Equity
$1 ordinary shares 80,000 40,000
Retained earnings 25,000 10,000
105,000 50,000
Current liabilities 20,000 20,000
Total equity and liabilities 125,000 70,000
Required
A) Compute the NCI (@ share of NA of
Sub.) & Prepare the cons. SOFP.
 Solution
Working 1: NCI @ share of NA
$
Non-controlling share of share capital (25% x $40,000) 10,000
Non-controlling share of retained earnings (25% x $10,000) 2,500
12,500
P GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
$ $
Assets
Property, plant and equipment 85,000
Current assets 80,000
Total assets 165,000
Equity and liabilities
Equity attributable to owners of the parent
Share capital 80,000
Retained earnings $(25,000 + (75% x $10,000)) 32,500
112,500
Non-controlling interest 12,500
125,000
Current liabilities 40,000
Total equity and liabilities 165,000
3.Goodwill Accounting
Goodwill: is the excess of the amount
transferred plus the amount of non-
controlling interests over the fair
value of the net assets of the subsidiary.

•GOODWILL = Consideration
transferred + Fair value of NCI share –
Fair value of identifiable net assets
 Class-work
• Suppose P Co purchases all 40,000
$1 shares (100%) in S Co (With
FV=$56,000) and
• pays $60,000 cash to the previous
shareholders in consideration.
•
• Required
• Calculate GOODWILL
 G-will & NCI Computation-
Alternatives
EXAMPLE:
P holds 60% of S. Assume that:
• FV of Net identifiable assets of Sub Co. on date of combination = $ 2,000,000
•The total consideration transferred by Parent Co = $ 1,600,000

•The FV of the NCI (40%) = $ 900,000

•Assume the G-will Impairment amt= 100,000

Required
1) Compute the G-will amt under
A) Share of NA Method (proportionate method)
B) FV (Full) Method
2) What is the Carrying AMT of G-Will after 1-year
Solution:
NCI at end of reporting period
The option to value the NCI @ FV applies
to NCI at acquisition.
Thus, it will affect the valuation of NCI at
the year end.
•Assume, NA of Sub. is now = $3m)
In computing the NCI @ FV; Use EITHER
the
1)FV of the NCI OR
2) the share price @ the date of
acquisition
Solution =Reporting period Balance
 Goodwill and Pre-acquisition
profits
Assume that P Co. paid $60,000 cash as a
total consideration to acquire all outstanding
shares of S Co. On date of acquisition, S
Co. has the ff position:
$
Total assets 48,000
Share capital 40,000
Retained earnings 8,000*
48,000
*S Co. had earned profits of $8,000 in the period
before acquisition
Q: What is G-will up on acquisition?
Goodwill and pre-acquisition profits , cont’d…
 Impairment of goodwill
 Goodwill arising on consolidation is subjected to
an annual impairment review and impairment may
be expressed as an amt or as a %.
The entry to write off the impairment is:
Group retained earnings …………….. xxx
Goodwill ………………………………….. xxx
• When NCI is valued @ fair value, the G-will in the
SOFP includes G-will attributable to the NCI.
The entry would be:
Group retained earnings xxx
Non-controlling interest xxx
Goodwill xxxx
 CSFP Workings
Working:

(W1) Group Structure

(W2) Net Assets

(W3) Goodwill

(W4) Non-controlling Interests

(W5) Group Reserves

CSFP Implications
 STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20X8
PING CO PONG CO
Comprehensive Illustration
$ $
(Home-take)
Assets
Non-current assets
Property, plant and equipment 50,000 40,000
20,000 ordinary shares in Pong Co at cost 30,000
80,000
Current assets
Inventory 3,000 8,000
Receivable from Ping Co 10,000
Receivables 16,000 7,000
Cash 2,000 –
21,000 25,000
Total assets 101,000 65,000
Equity and liabilities
Equity
Ordinary shares of $1 each 45,000 25,000
Revaluation surplus 12,000 5,000
Retained earnings 26,000 28,000
83,000 58,000
Current liabilities
Payable to Pong Co 8,000 –
Trade payables 10,000 7,000
18,000 7,000
4. Intra-group trading
1.Unrealised profit:
Elliminated

2.NCI in unrealised intra-

group profits: Shares part
of the UGP.
 Example: Unrealized Profit
P Co has owned 75% of the shares of S Co since the incorporation of
that company. During the year to 31 Dec. 20X2, S Co sold goods
costing $16,000 to P Co at a price of $20,000 and these goods were
still unsold by P Co at the end of the year. Draft SOFP of each co. at
31 Dec 20X2 were:
Required: Prepare the consolidated statement of financial position of
P Co at 31 December 20X2. The FV of the NCI at acquisition was
$25,000.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 20X2
$ $
Assets
Property, plant and equipment 245,000
Current assets
Inventories $(50,000 + 48,000 – 4,000) 94,000*
Trade receivables 36,000
130,000
Total assets 375,000
Equity & liabilities
Ordinary shares of $1 each 80,000
Retained earnings 192,000**
272,000
Non-controlling interest 39,000***
311,000
Current liabilities 64,000
Total equity and liabilities 375,000
 5.2 THE CONSOLIDATED
STATEMENT OF PROFIT OR LOSS
1.
1. Consolidation
Consolidation procedure:
procedure:
 Combine all P and S results from revenue to Profit
after tax.
•Time apportion where the acquisition is mid-year

 Exclude intra group investment income.

 Calculate NCI (NCI% × S's PAT)
 Adjustments required
 Eliminate intra group sales and purchases
 Eliminate unrealised profit on intra group purchases
still in inventory at the year end
 Eliminate intra-group dividends
 Split profit for the year b/n group & NCI
Simple
Simple Ex:
Ex: consolidated
consolidated I/St
I/St
 P Co acquired 75% of the ordinary shares of S Co on that company's incorporation in 20X3.
 Condensed st. of P/L & movement on REs of the two Co.s for the year ending 31 Dec 20X6
are set out below. P Co
S Co

Required: Prepare the C-SP/Land extract from the st. of changes in

equity; showing REs and NCI.
 P CO
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 31 DECEMBER 20X6
2.
2. Intra
Intra Group
Group Trading
Trading
 Intra-group sales and purchases are eliminated from the
consolidated statement of profit or loss.

 The cons. figures for sales revenue & CGS should

represent sales to, & purchases from, outsiders.

 An adj. is therefore needed to reduce the sales revenue

and cost of sales figures by the value of intra-group
sales during the year.
Example:
Example: Intra
Intra Group
Group Trading
Trading

Suppose in our earlier example that S Co had recorded

sales of $5,000 ( Cost=$3,000) to P Co during 20X6.
One half of the goods remained in P Co's inventory at 31
December 20X6.

RQD: Prepare the consolidated statement of profit or loss.

Example
Example :: Solution
Solution
Cons. St. of P/L for the year ended 31 December 20X6

Sales revenue (75 + 38 – 5) 108,000

Cost of sales (30 + 20 – 5 + 1*) (46,000)
Gross profit (45 + 18 – 1*) 62,000
Administrative expenses (22,000)
Profit before taxation 40,000
Income tax expense (12,000)
Profit for the year 28,000
Profit attributable to :
Owners of the parent 26,250
Non-controlling interest (8,000 – 1,000) × 25% 1,750
28,000

* Unrealised profit: ½*($5,000 – $3,000) = $1,000

2.
2. Intra-Group
Intra-Group Dividends
Dividends
 The group RE are only adjusted for dividends paid to
the parent Co. owners.
 Dividends paid by the subsidiary to the parent are
cancelled on consolidation
 AND dividends paid to the NCI are replaced by the
allocation to the NCI of their share of the profit for the
year of the subsidiary.
3.
3. Pre-acquisition
Pre-acquisition Profits
Profits
 Only the post-acquisition profits of the subsidiary
are brought into the consolidated profit or loss.
 If the subsidiary is acquired during the accounting
year, it is therefore necessary to apportion its
profit for the year b/n pre & post-acquisition elements.
 This can be done by simple time apportionment (ie
assuming profits arose evenly throughout the year)

 Only the post-acquisition figures are included in the

consolidated statement of profit or loss.
EXAMPLE: P Co acquired 60% of the $100,000 equity of S
Co on 1 April 20X5.
The SOPL of the both for year-end31 Dec 20X5 are below.
 P CO
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 31 DECEMBER 20X5
End!
End!