Chapter Six
Consolidation Subsequent to Acquisition
6.1. Accounting for investments in subsidiaries
companies can choose between the equity method for investments
where there is significant influence but not control, and
the consolidated method for situations where there is majority
ownership or control over subsidiaries.
The consolidated method is employed when the parent company
has more than 50% ownership or control over the subsidiary.
With this method, the financial statements of both the parent and
subsidiary are combined into a single set of financial statements.
Intercompany transactions and balances are eliminated to avoid
double counting and ensure accuracy.
Consolidation ensures a comprehensive view of the financial
position and performance of both entities as if they were a single
entity.
This method is necessary for preparing consolidated financial
statements that provide a complete picture of the group’s financial
health.
Consolidated financial statements for wholly owned
subsidiary
Under IFRS (International Financial Reporting Standards),
a wholly owned subsidiary is a subsidiary in which the
parent company owns 100% of the outstanding common
stock.
When preparing consolidated financial statements for a
wholly owned subsidiary under IFRS, the parent company
must follow specific guidelines outlined in IFRS 10 -
Consolidated Financial Statements.
a. Control Requirement: According to IFRS 10, control is
the determining factor for consolidation.
Control is defined as having exposure or rights to variable
returns and the ability to affect those returns through
power over an investee.
b. Preparation of Consolidated Financial Statements:
The parent entity, which controls one or more other
entities, is required to present consolidated financial
statements under IFRS.
These statements combine the financial information of
the parent company and its wholly owned subsidiaries
into a single set of financial statements that reflect the
economic entity as a whole.
c. Identification of Control: To determine whether an
investor controls an investee (wholly owned subsidiary in
this case),
the parent company must assess its ability to direct the
relevant activities of the subsidiary and obtain variable
returns from its involvement with the subsidiary.
d. Accounting Requirements: IFRS 10 sets out specific
accounting requirements for the preparation of
consolidated financial statements, ensuring that all assets,
liabilities, equity, income, expenses, and cash flows of the
parent and its wholly owned subsidiaries are presented as
those of a single economic entity.
e. Investment Entity Exception: There is an exception
outlined in IFRS 10 for investment entities that may not
need to consolidate particular subsidiaries if they meet
certain criteria related to their business purpose and
investment management services.
f. Power Over Relevant Activities: The concept of “power”
in controlling an investee refers to existing rights that give
the current ability to direct activities that significantly affect
the investee’s returns.
Consolidated financial statements for partially
owned subsidiary
Under IFRS the treatment of partially owned
subsidiaries in consolidated financial statements
involves specific guidelines to determine how
these entities are included in the reporting.
When a parent company has partial ownership in
a subsidiary, it must assess the level of control it
exercises over that subsidiary to decide on the
consolidation approach.
Control Assessment:
• The key factor in determining whether a partially owned
subsidiary should be included in consolidated financial statements
is the level of control the parent company has over the subsidiary.
• An investor controls an investee if it has all elements of control,
including exposure to variable returns and power over decision-
making processes.
Consolidation Decision:
• If a parent company holds more than 50% ownership in a
subsidiary can consolidate the subsidiary.
• Factors such as board representation, voting rights, contractual
arrangements, and other relevant circumstances are considered in
assessing control.
• The determination of whether to consolidate a partially owned
subsidiary depends on the specific facts and circumstances of
each case.
Equity Method vs. Consolidation:
• In cases where a parent company does not have
control over a partially owned subsidiary but has
significant influence, it may account for its
investment using the equity method.
• The equity method involves recognizing the
investment at cost and adjusting it for the parent’s
share of the subsidiary’s net income or loss.
• Consolidation, on the other hand, combines all
financial aspects of both entities into a single set
of financial statements, reflecting them as one
economic entity.
Consolidated financial statements: Intra-group
trading (Upstream and Downstream Transactions)
Intra-group trading in consolidated financial
statements refers to transactions that occur
between entities within the same group of
companies. These transactions can involve the
buying and selling of goods, services, or assets
between subsidiaries, associates, or the parent
company within a corporate group
1. Unrealised profit eliminated
2. NCI in unrealised intra group profits: Shares part
of the unrealized group profit.
Elimination of Intra-Group Trading Balances
• One of the key aspects of accounting for intra-group
trading in consolidated financial statements is the
elimination of intra-group trading balances.
• Entities within the same group will often trade with each
other and this can lead to some intra-group balances
which need to be eliminated.
This is required because of the single economic entity
approach to consolidated financial statements.
For example, if Company A sells goods to Company B, and
Company B hasn’t sold those goods externally yet, there
would be an accounts receivable on Company A’s books and
an accounts payable on Company B’s books.
In the consolidation process, these intercompany balances
are eliminated to prevent overstating assets and liabilities.
In the context of consolidated financial statements, intra-group trading involves
transactions between entities within the same group.
These transactions can be categorized as either upstream or downstream
transactions based on the direction of the flow of goods, services, or funds.
Upstream Transactions:
• It occur when a subsidiary company sells goods, services, or assets to its
parent company or another entity higher up in the ownership chain.
Example: If Company A owns 80% of Company B, and Company B sells
products to Company A, this would be considered an upstream transaction.
• Impact on Consolidated Financial Statements: In consolidated financial
statements, revenues and profits from upstream transactions are eliminated
to avoid double-counting.
Any unrealized profits from these transactions are also eliminated to reflect
the economic substance of the transaction accurately.
Downstream Transactions:
• It take place when a parent company sells goods, services, or assets to its
subsidiary or another entity lower down in the ownership chain.
Example: If Company X owns 70% of Company Y, and Company X sells
inventory to Company Y, this would be classified as a downstream transaction.
Example 1: Pink Co acquired 80% of Scarlett Co’s
ordinary share capital on 1 January 2012. As at 31
December 2012, extracts from their individual
statements of financial position showed:
Pink C $ Scarlett Co $
Current assets: Receivables 50,000 30,000
Curent labilités: Payables 70,000 42,000
As a result of trading during the year, Pink Co’s receivables balance
included an amount due from Scarlett Co of $4,600. Scarlett Co has a
corresponding payables balance.
Required: determine the consolidated figure for receivables and
payables?
Solution
• As we have mentioned earlier, the intra-group balances at the
year-end need to be eliminated, as the consolidated accounts
need to show the group as a single economic entity.
• The group statement of financial position should only include
amounts owed and owing to entities outside the group.
• As Pink Co shows a receivable of $4,600, then in Scarlett Co’s
individual accounts there must be a corresponding payable of
$4,600.
When these balances are eliminated, the consolidated figures in
consolidated financial statement become:
Receivables=($50,000+$30,000–$4,600)=$75,400
Payables = ($70,000 + $42,000 – $4,600) = $107,400
Example 2: P com. Has owned 75% of the share of S
com since the incorporation of that company. During
the year to 31, Dec 2012 S com sold goods costing
$16,000 to P com at a price of $20,000 and these
goods were still unsold by P com at the end of the
year. Draft SOFP of each company at 31 Dec 2012
were as follows:
SOFP
AT Dec 31, 2012
P com. S com.
Assets
PPE $125,000 $120,000
Inv.t 75,000 shares in S com. at cost 75,000
Inventories 50,000 48,000
Trade Receivables 20,000 16,000
Total Assets $270,000 $184,000
Equities and Liabilities
Ordinary share of $1 each fully paid 80,000 100,000
Retained Earnings 150,000 60,000
Current liabilities 40,000 24,000
Total Equity and liability $270,000 184,000
Required: Prepare Consolidated SOFP of P com at 31, Dec 2012. the FV of
the NCI at acquisition was $25,000.
P Group
Consolidated SOFP
At 31, Dec 2012
Assets
PPE( 125,000 +120,000) $245,000
Current Assets
Inventories ( 50,000 +48,000 -4000) 94,000**
Trade Receivables (20,000 +16,000) 36,000
Total Assets $375,000
Equities and liabilities
Ordinary Shares of $1 each 80,000
Retained Earnings 192,000**
NCI ( 60,000 *.25 +100,000*.25 – 1000**) 39,000
Current Liabilities (40,000 +24,000) 64,000
Total Equities and liabilities $375,000
Impairment of Good Will
Goodwill Arising on consolidation is subject to an
annual impairment review and impairment may be
expressed as an amount or as a % .
The entry to write off the impairment is
Group Retained Earning ------- xx
Goodwill ------------------------ xx
When NCI is valued at full fair value the Good will in
the SOFP includes Good will attributable to the NCI.
The entry would be:
Group Retained Earning ------- xx
NCI ----------------------------------- xx
Goodwill -------------------------- xx
Example: P holds 60% of S assume the following
FV of NIA of sub com. On date of combination =
$2,000,000
Total consideration transferred by parent com. =
$1,600,000
The FV of NCI 40% = $900,000
Assume Goodwill impairment amount = $100,000
Required: compute the good will amount under
a. Share of Net Asset method
b. Fair value (full) method and
c. Carrying value of good will
d. Entry to record to write off the impairment of Good
Solution
Net Asset method Fair value (full) method
Consideration transferred 1,600,000 Consideration transferred 1,600,000
+ NCI (2,000,000 *.4) 800,000 NCI 900,000
Less net Assets (2,000,000) Less net Assets (2,000,000)
Good Will $400,000 Good Will $500,000
Less impairment (100,000) Less impairment (100,000)
Carrying Value of GW $300,000 Carrying Value of GW $400,000
The entry to record impairment The entry to record impairment
Group RE 100,000 Group Re 60,000
Goodwill 100,000 NCI 40,000
Goodwill 100,000
Consolidated Statement of Profit/Loss
Combine all profits and sales results from revenue
to profit after tax
Time apportion where the acquisition is mid year.
Exclude intra group investment income
Calculate NCI which is NCI % * Subsidiary PAT.
Eliminate intra group sales and purchase
Eliminate unrealized profit on intra group
purchases still in inventory at the year end
Eliminate intra group dividends
Split profit for the year b/n Group and NCI
Example: P com. Acquired 75% of the ordinary shares of S
com. On that company’s incorporation in 2013. condensed
statement of P/L and Movement on RE of the two company
for the year ending 31 Dec, 2016 were set out bellow:
P Com. S com.
Sales Revenue $75,000 $38,000
Cost of Sale (30,000) (20,000)
Gross Profit 45,000 18,000
Administration Expense (14,000) (8000)
Profit Before Tax 31,000 10,000
Income tax expense (10,000) (2000)
Profit for the year $21,000 $8000
Note: Movement on Retained Earnings
P com. S com.
Retained Earning Brought $87,000 $17,000
forward
Profit for the year 21,000 8000
Retained Earning Carried $108,000 $25,000
forward
Required: Prepare consolidated statement of profit/loss
and extract from the statement of changes in equity ,
showing Res and NCI.
Solution
P com.
Consolidated SOP/L
For the year ended 31,Dec 2016
Sales Revenue (75 +38) $113,000
Cost of sale (30 +20) (50,000)
Gross Profit 63,000
Admi. Expense (14 +8) (22,000)
Profit Before Tax $41,000
Income Tax Expense(10 +2) (12,000)
Profit for the year $29,000
Profit Attributable to:
Parent (21,000 + .75 *8000) $27,000
NCI ( .25 * 8000) 2000
Total $29,000
Statement of Changes in Equity ( Extract)
Retained NCI Total
Earnings Equity
Balance at 1 Jan 99,750 4250 104,000
2016 (17,000*.75 (17,000 *
+ 87,000) .25)
Total Comprehensive 27,000 2000 29,000
income for the year
Balance at 31, Dec $126,750 $6,250 $133,000
2016
Pre- Acquisition and Post Acquisition Profit
a. Pre-acquisition profits are the retained earnings of the
subsidiary which exist at the date when it is acquired.
These profits belong to the previous shareholders as they
were earned under their ownership.
The new parent cannot lay claim to these profits so they
are excluded from group retained earnings.
b. Post-acquisition profits are those profits recognised in
retained earnings by the subsidiary at the year-end but
earned since the new parent purchased their shareholding.
As these were earned under the ownership of the new
parent an appropriate percentage (based upon the
parent's % ownership) can be recognised in group
retained earnings.
Con……………………..
Only the post acquisition profit of the subsidiary
are brought in to 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 and post acquisition
elements.
Example: P com. Acquired 60% of the $100,000
equity of S com. On 1 April 2015.
The statement of profit or loss (SOP/L) of both for
year end 31, Dec 2015 are given bellow:
P com. S com S Com. (9/12)
Sales Revenue $170,000 $80,000 $60,000
Cost of Sale (65,000) (36,000) (27,000)
Gross Profit 105,000 44,000 33,000
Other income: Dividend 3,600
Received S com
Administration Expense (43,000) (12,000) (9,000)
Profit before tax 65,600 32,000 24,000
Income tax Expense (23,000) (8000) (6000)
Profit for the year $42,600 $24,000 $18,000
Required: Prepare consolidated statement of
profit or loss for the year ended 31,Dec 2015.
Solution
P com.
Consolidated SOP/L
for the year ended 31,Dec 2015
Sales Revenue (170 +60) $230,000
Cost of sale (65 +27) (92,000)
Gross Profit 138,000
Admi. Expense (43 +9) (52,000)
Profit before tax 86,000
Income tax expense (23 +6) (29,000)
Profit for the year $57,000
Profit Attributable to:
The Parent (42,600 – 3600) +(18,000 *.6) $ 49,800
NCI ( 18,000 *.4) $ 7, 200
Total $57,000
Disclosure requirements
When including a partially owned subsidiary in
consolidated financial statements under IFRS, specific
disclosures are necessary to provide transparency about
the relationship between the parent and subsidiary.
These disclosures typically include information about
significant accounting policies, intercompany
transactions, balances between related parties, and any
contingent liabilities related to the subsidiary.
under IFRS, when dealing with partially owned
subsidiaries in consolidated financial statements
careful consideration of control factors is essential to
determine whether consolidation is required based on
the level of influence exerted by the parent company.
END OF CHAPTER SIX
THANK YOU!!!