18.
Consolidated Statement of Profit or Loss
Basic principle
The consolidated statement of profit or loss combines the financial statements of parent and subsidiary
(subsidiaries) to present the results for the accounting period as the results of a single economic unit.
The consolidated statement of profit or loss follows these basic principles:
1. From revenue down to profit for the year include all of Parent’s income and expenses plus all of
Subsidiary’s income and expenses (reflecting P’s control of S).
2. After profit for the year the whole of S Co's results is included without reference to group share
or non-controlling share. A one-line adjustment is then inserted to deduct the non –controlling
The mechanics of consolidation
1st Group structure diagram
2nd Proforma statement of profit or loss, combining income and expense for both parent and subsidiary
3rd workings for any adjustments detailed in the question, e.g. PUP, fair value depreciation etc.
4th non-controlling interest (NCI) share of profit (see below)
Non-controlling interest
Subsidiary’s profits after tax X
Less: Fair value depreciation (X)
PUP (where subsidiary is seller) (X)
Impairment (if using the fair value method) (X)
Adjusted subsidiary profit X
Non-controlling interest (× NCI %) X
Intra-group trading
Sales and purchases
When one company in a group sells goods to another the relevant amount is added to the sales revenue of
the first company and to the cost of sales of the second. Yet as far as the entity's dealings with outsiders
are concerned no sale has taken place.
The consolidated figures for sales revenue and cost of sales should represent sales to and purchases
from, outsiders. An adjustment is therefore necessary to reduce the sales revenue and cost of
sales figures by the value of intra-group sales during the year.
Consolidated sales revenue = P’s revenue + S’s revenue – intra-group sales.
Consolidated cost of sales (COS) = P’s COS + S’s COS – intra-group sales.
Interest
If there is a loan outstanding between group entities the effect of any loan interest received and
paid must be eliminated from the consolidated statement of profit or loss.
The relevant amount of interest DR should be:
i. deducted from group investment income and
ii. Group finance costs.
In cases of a there is a mid-year acquisition, the finance costs may include interest on a loan from
the parent which has only arisen in the post-acquisition period.
For example,
o If the subsidiary's finance costs were $400,000 and the parent has owned the subsidiary for six
months, the finance costs to be consolidated would normally be $200,000 ($400,000 × 6/12).
o However, if, on acquisition, the parent loaned the subsidiary $2m at 10% interest, there will be
$100,000 of finance cost in the second six months that would not appear in the first six
months.
The interest charge without the parent loan interest would be $300,000. Six months of this
would be $150,000, and this is the figure that would be included within the consolidated
statement of profit or loss.
Dividends
A payment of a dividend by S to P will need to be removed from investment income in the statement of
profit or loss. The
effect of this on the consolidated statement of profit or loss is that any dividend income shown in the
consolidated
statement of profit or loss must arise from investments other than those in subsidiaries or associates.
Note that only dividends paid by P to its own shareholders appear in the consolidated financial
statements
Provision for unrealised profit
Inventory
We have also seen in an earlier chapter that any unrealised profits on intra-group trading should be
excluded from the figure for group profits. This will occur whenever goods sold at a profit within the group
remain in the inventory of the purchasing company at the year end.
o The best way to deal with this is to calculate the unrealised profit on unsold inventories at
the year end and reduce consolidated gross profit by this amount. Cost of sales will be the
balancing figure.
Effect on non-controlling interests
If the unrealised profit originally arose in the subsidiary, the non-controlling interest must be
adjusted for its share of the unrealised profit.
1st All unrealised Profit must be eliminated from the profit earned by Group trading as if it were a single
entity.
The NCI’s share is then calculated by reference to the reduced amount of the subsidiary's profit.
PUP is added on to the group cost of sales and the NCI’s share is removed in the NCI working.
Illustration 2 – Unrealised profit in CSPL
On 1 January 20X9 Zebedee acquired 60% of the ordinary shares of Xavier. The following statements of
profit or loss have been produced by Zebedee and Xavier for the year ended 31 December 20X9.
Zebedee Xavier
$000 $000
Revenue 1,260 520
Cost of sales (420) (210)
Gross profit 840 310
Distribution costs (180) (60)
Administration expenses (120) (90)
Profit from operations 540 160
Investment income from Xavier 36
Profit before tax 576 160
Income tax expense (130) (26)
Profit for the year 446 134
During the year ended 31 December 20X9 Zebedee sold $84,000 worth of goods to Xavier. These goods
had cost Zebedee $56,000. On 31 December 20X9 Xavier still had $36,000 worth of these goods in
inventories (held at cost to Xavier).
Prepare the consolidated statement of profit or loss to incorporate Zebedee and Xavier for the
year ended 31 December 20X9.
Workings:
Group structure
Zebedee
[Link] X9 60%
Xavier
Unrealised profit in inventory
$000
Selling price 84
Cost (56)
Total profit 28
Closing inventory held by Xavier = 36
Profit included in closing inventory = 28 × 36/84 = 12
Non-controlling interest
$000
NCI share of Xavier profit = 40% × 134 53.6
Consolidated statement of profit or loss for the year ended 31 December 20X9
$000
Revenue (1,260 + 520 – 84 intra-group) 1,696
Cost of sales (420 + 210 – 84 intra-group + 12) (558)
Gross profit 1,138
Distribution costs (180 + 60) (240)
Administrative expenses (120 + 90) (210)
Profit before tax 688
Income tax expense (130 + 26) (156)
Profit for the year 532
Profit attributable to:
Owners of parent (532 – NCI) 478.4
Non-controlling interests 53.6
Transfers of non-current assets
If one group company sells a non-current asset to another group company the following adjustments
are needed in the statement of profit or loss to account
1. for the unrealised profit and
2. The additional depreciation.
Any profit or loss arising on the transfer must be removed from the consolidated statement
of profit or loss included in the seller's profit
The depreciation charge for the buyer must be adjusted so that it is based on the cost of the
asset to the group.
Unrealised profit on non-current assets
If, a seller makes a profit on the sale of a non-current asset, the buyer will account for the asset at a value
higher than the depreciated cost to the group. The profit made by the seller is gradually realised over the
asset’s remaining life by the buyer’s depreciation charges being calculated on a value higher than original
cost to the group. So at the time when the buyer has fully depreciated the acquired asset, the whole of the
seller’s profit has been realised and no adjustments are necessary.
However, as long as the buyer is still depreciating the acquired asset, the amount of the seller’s unrealised
profit must be eliminated from both earnings and the carrying amount of the asset. Adjustments are
needed on the statement of financial position in order to return to the situation if the sale had not taken
place:
o Any remaining unrealised profit or loss arising on the transfer is eliminated by removing the profit
on transfer from the seller and removing the excess depreciation from the buyer
o The asset’s cost and accumulated depreciation are adjusted so that they are based on the cost of
the asset to the group.
Similar adjustments are necessary in the statement of profit or loss, to remove the profit on the sale from
the seller and the excess depreciation from the buyer. Note that the profit will only need to be removed in
the year of sale, and the depreciation adjustment will need to be time-apportioned if the sale takes place
part-way through the current year.
Other CSPL adjustments
Impairment of goodwill
Once any impairment has been identified during the year, the charge for the year will be passed through
the consolidated statement of profit or loss. This will usually be through operating expenses, but
always follow any instructions from
the examiner.
* If non-controlling interests have been valued at fair value, a portion of the impairment expense
must be removed from the non-controlling interest's share of profit.
Fair values
If a depreciating non-current asset of the subsidiary has been revalued as part of a fair value
exercise when calculating goodwill, this will result in an adjustment to the consolidated statement of
profit or loss.
Extra depreciation must therefore be calculated and charged to an appropriate cost category (usually cost
of sales, but in line with examiner requirements).
Test your understanding 1
Set out below are the draft statements of profit or loss of Prunes and its subsidiary company Sultanas for
the year ended 31 December 20X7. On 1 January 20X6 Prunes purchased 75,000 of Sultanas’ total share
capital of 100,000 $1 ordinary shares.
Statements of profit or loss for the year ended 31 December 20X7
Prunes Sultanas
$000 $000
Revenue 600 300
Cost of sales (360) (140)
Gross profit 240 160
Operating expenses (93) (45)
Profit from operations 147 115
Finance costs – (3)
Profit before tax 147 112
Income tax expense (50) (32)
Profit for the year 97 80
The following additional information is relevant:
(i) During the year Sultanas sold goods to Prunes for $20,000, making a mark-up of one third. Only 20% of
these goods were sold before the end of the year, the rest were still in inventory.
(ii) Goodwill has been subject to an impairment review at the end of each year since acquisition and the
review at the end of the current year revealed a further impairment of $5,000. Impairment is to be
recognised as an operating cost.
(iii) At the date of acquisition a fair value adjustment was made and this has resulted in an additional
depreciation charge for the current year of $15,000. It is group policy that all depreciation is charged to
cost of sales.
(iv) Prunes values the non-controlling interest using the fair value method.
Prepare the consolidated statement of profit or loss for the year ended 31 December 20X7 for
the Prunes group.
Workings:
Group structure
Prunes
01 Jan X6 75%
Sultanas
Unrealised profit in inventory
= (20,000 x 20%) x (33/133) = 4,000
Non-controlling interest
$000
Subsidiary profit the year 80
Less:
PUP (4)
Impairment (5)
Fair Value Depreciation (15)
56
NCI @ 25% 14
$000
Revenue (600 + 300 – 20) 880
Cost of sales (360 + 140 -20 + 4 +15 (FV Depn)) (499)
Gross profit 381
Operating expenses (93 + 45 + 5(impairment)) (143)
Profit from operations 238
Finance costs (3)
Profit before tax 235
Income tax expense (50 +32) (82)
Profit for the year 153
Attributable to:
Owners of parent (153 – 14) 139
Non-controlling interest 14
153
Test your understanding 2
Given below are the statements of profit or loss for Paris and its subsidiary London for the year ended 31
December 20X5.
Paris London
$000 $000
Revenue 3,200 2,560
Cost of sales (2,200) (1,480)
Gross profit 1,000 1,080
Distribution costs (160) (120)
Administrative expenses (400) (80)
Profit from operations 440 880
Investment income 160 –
Profit before tax 600 880
Taxation (400) (480)
Profit for the year 200 400
Additional information:
(i) Paris paid $1.5 million on 31 December 20X1 for 80% of London’s 800,000 ordinary shares.
(ii) Goodwill impairments at 1 January 20X5 amounted to $152,000. A further impairment of $40,000 was
found to be necessary at the year-end. Impairments are included within administrative expenses.
(iii) Paris made sales to London at a selling price of $600,000 during the year. Not all of the goods had
been sold externally by the year-end. The profit element included in London’s closing inventory was
$30,000.
(iv) Additional fair value depreciation for the current year amounted to $10,000. All depreciation should be
charged to cost of sales.
(v) London paid an interim dividend during the year of $200,000.
(vi) Paris values the non-controlling interest using the fair value method.
Prepare a consolidated statement of profit or loss for the year ended 31 December 20X5 for the Paris
group.
Workings:
Group structure
Paris
31 Dec X1 80%
London
Unrealised profit in inventory = 30,000
Non-controlling interest
$000
Subsidiary profit the year 400
Less:
PUP (30)
Impairment (40)
Fair Value Depreciation (10)
350
NCI @ 20% 70
$000
Revenue (3,200 + 2,560 – 600) 5,160
Cost of sales (2,200 + 1,480 – 600 +30 +10) (3,120)
Gross profit 2,040
Investment Income (External only) -
Distribution costs (160 + 120) (280)
Administrative expenses (400 + 80 +40) (520)
Profit before tax 1,240
Taxation (400 + 480) (880)
Profit for the year 360
Attributable to:
Owners of parent (360-70) 290
Non-controlling interest 70
360
Mid-year acquisitions
Mid-year acquisition procedure
If a subsidiary is acquired part way through the year, then the subsidiary’s results should only be
consolidated from the date of acquisition, i.e. the date on which control is obtained.
In practice this will require:
o Identification of the net assets of S at the date of acquisition in order to calculate goodwill.
o Time apportionment of the results of S in the year of acquisition. For this purpose, unless indicated
otherwise, assume that revenue and expenses accrue evenly.
o After time-apportioning S’s results, deduction of post-acquisition intra-group items as normal .
Test your understanding 3
Pepper bought 70% of Salt on 1 July 20X6. The following are the statements of profit or loss of Pepper
and Salt for the year ended 31 March 20X7:
Pepper Salt
$000 $000
Revenue 31,200 10,400
Cost of sales (17,800) (5,600)
Gross profit 13,400 4,800
Operating expenses (8,500) (3,200)
Profit from operations 4,900 1,600
Investment income 2,000 –
Profit before tax 6,900 1,600
Income tax expense (2,100) (500)
Profit for the year 4,800 1,100
The following information is available:
(I) On 1 July 20X6, an item of plant in the books of Salt had a fair value of $5,000 in excess of its carrying
amount. At this time, the plant had a remaining life of 10 years. Depreciation is charged to cost of
sales.
(II) During the post-acquisition period Salt sold goods to Pepper for $4,400. Of this amount, $500 was
included in the inventory of Pepper at the year-end. Salt earns a 35% margin on its sales.
(III) Goodwill amounting to $800 arose on the acquisition of Salt, which had been measured using the fair
value method. Goodwill is to be impaired by 10% at the year-end. Impairment losses should be charged
to operating expenses.
(IV)Salt paid a dividend of $500 on 1 January 20X7.
Required:
Prepare the consolidated statement of profit or loss for the year ended 31 March 20X7 for the
Pepper group.
Workings:
Group structure
Pepper
09mths 70%
Salt
Pup on inventory
Cost + Profit = Selling Price
65 + 35 = 100
500 x 25% = 175
Non-controlling interest
$000
Subsidiary profit the year (9mths only) (1,100 * 9/12) 825
Less:
PUP (175)
Impairment (10% *800) (80)
Fair Value Depreciation (5,000/10yrs)* 9/12 (375)
195
NCI @ 30% 58.50
Dividend
The subsidiary paid a dividend of $500 and so the parent will have recorded investment income of 70% ×
500 = $350. As an intra-group transaction this needs eliminating .
$000
Revenue 31,200 + (10,400 * 9/12) – 4,400 34,600
Cost of sales (17,800) + (5,600 * 9/12) – 4,400 + 375 +175 (18,150)
Gross profit 16,450
Operating expenses (8,500 + 80) + (3,200 * 9/12) (10,980)
Profit from operations 5,470
Investment income (2,000 – 350) 1,650
Profit before tax 7,120
Income tax expense 2,100 + (500 * 9/12) 2,475
Profit for the year 4,645
Profit attributable to:
Owners of parent (4,645 – 58) 4,587
NCI 58
4,645