Chapter 6 & Chapter 7 _ part 1

Introduction of Consolidated Financial Statements

Consolidated Statement of Financial Position

Source: ACCA F3 _ Financial Accounting

Consolidated Financial Statements

3
Principles of Consolidated Financial Statements
Group Accounts

Many entities carry on part of their business by controlling other

companies, known as subsidiaries.

The financial statements of the investing entity will recognise the

following:

• Investments in subsidiaries at cost (or per IFRS 9 Financial

Instruments) in the statement of financial position and

• Dividends received from a subsidiary when its right to the dividend is

established (when it is declared) in the statement of profit or loss.

4
Key Point

Key point

Since IFRS 9 is not examinable in Financial

Accounting, investments in subsidiaries are stated
at cost in the statement of financial position of the
investing company.

5
Investing Strategies, Ownership Levels and the Impact on
Financial Reporting
Continuum of intercorporate ownership (under previous accounting standards such as
IAS 27, IFRS 12, IAS 28, IFRS 13 and IAS 31)

Zero 20% 50% 100%

Ownership Ownership Ownership Ownership
Significant
Passive Control
Influence
Quantitative
Active thresholds do NOT
Passive Active apply in IFRS 10,
Investment Investment Investment
but they are often
used as a rule of
• Trading • Associated thumb measure in
• Partially-owned subsidiary
securities company straight forward
• Fully-owned subsidiary situations
• Available- for- • Joint-
p
sale securities arrangements
u 1. Exert significant 1. Gain entry intro a new market
r 1. Earn dividend influence or 2. Achieve synergistic benefits
p 2. Make capital control over from complementary
o
gain investee’s strengths
s
operation 3. Gain market dominance
e
6
Types of investments

7
Source: www.IFRSbox.com
Group Accounts
Controlling interests may result in the control of assets that have a very
different value to the cost of investment. In this case, the individual
accounts will not provide the owners of the parent with a true and fair
view of what their investment represents.

• In Example 1 below, group accounts are needed to provide users of

financial statements with more meaningful information reflecting the
investment’s substance. (This substance is not reflected in the
investing entity’s separate financial statements.)

• The group accounts required by IFRS are consolidated financial

statements; the relevant standard is IFRS 10 Consolidated Financial
Statements.

8
Example 1
A parent company invested in 80% of another company, which now
makes it a subsidiary of the parent company.

Parent Subsidiary
$ $
Investment in 80% of Subsidiary 560
Other net assets
(Assets less Liabilities) 400 700
1,000 700
Share capital 500 250
Retained earnings 500 450
1,000 700

9
Example 1
The investment of $560 in P's accounts is, in substance, the cost of
owning 80% of S's net assets (80% × $700 = $560).

The owners of P cannot know this from looking at P's statement of

financial position alone. Therefore, a consolidated financial statement
should be prepared to present the substance of the investment.

10
Group Accounts
Group Accounting Terms

A business combination is a transaction in which an acquirer obtains

control of another business.

A parent company with subsidiaries will prepare a separate financial

statement known as the consolidated financial statements. It is the
financial statements of a group presented as those of a single economic
entity.

11
Group Accounts
Group Accounting Terms

• Parent – A parent is a company, or other entity, that controls one or

more subsidiaries.

• Subsidiary – A subsidiary is an entity that is controlled by another

entity, known as the parent

12
Group Accounts
Group Accounting Terms

• Control – An investor controls its investment if it may receive varying

returns from its investment and can affect those returns through its
power over the subsidiary. IFRS 10 states that an investor controls an
investee if it has all the following:

—power over the investee

—exposure, or rights, to variable returns from its involvement with the
investee

—the ability to use its power over the investee to affect the amount of
the investor's returns.

13
Group Accounts
Group Accounting Terms

• Consolidated Financial Statements – Consolidated financial

statements are the financial statements of a group where the assets,
liabilities, income, expenses and cash flows of the parent and its
subsidiaries are presented as a single set of financial statements. It is
also known as group financial statements.

Both the parent and subsidiary are still distinct legal entities.

However, the group is not a separate legal entity; it exists for

accounting purposes.

14
Group Accounts
Group Accounting Terms

• Non-Controlling Interest – A non-controlling interest is the part of

the equity of a subsidiary that the parent does not own. For example,
a parent invests in 60% of a subsidiary. The remaining 40% is the
non-controlling interest.

• Trade Investment – A trade investment is an investment in shares

of another company to gain wealth, which is not significant enough
for the investment to be classed as a subsidiary or an associate.

Typically, this investment will be less than 20% of another company's

equity shares. A trade investment is also known as a simple
investment.

15
Group Accounts
Control

For a group structure to exist, there has to be a parent and a subsidiary.

IFRS uses the term "power" to consider whether an investor is a parent
having control over a subsidiary. Any of the following can achieve
control:

• Ownership
The parent owns more than 50% of the voting rights of the subsidiary.
Holders of equity shares have voting rights (*), but holders of
preference shares do not because their voting rights are restricted.

* Basing on ordinary shares

16
Group Accounts
Control

• Control by Agreement
The parent has agreed with other investors that it should control more
than 50% of voting rights.

• Board Appointment
A parent has the power to appoint and remove the board of directors of
a subsidiary

17
Group Accounts
Control

• Board Voting
The parent can cast a majority of votes at board meetings of a
subsidiary.

• Power over the Investee

The parent has existing rights that allow it to direct the relevant
activities of the investee. It has a legal right to govern the financial and
operating policies of the investee.

18
Example Control
Entity A holds 40% of the voting right in entity B. It also holds share
options which, if it were to exercise them, would take its shareholding in
entity B to 80%.(quyền chuyển đổi) The share options can be exercised
at any time.

Ignoring any other issues, it would be probable that entity A had control
over entity B through both its current share-holding and its potential
future shares. Entity B would be recognised as a subsidiary of entity A.

19
Exam Guidance

Exam advice

For calculation purposes in the exam, it is assumed that

control exists if the parent has more than 50% of the
ordinary (equity) shares (giving them more than 50% of
voting rights) unless specifically told otherwise.

20
Activity 1
For each statement below, state whether they are True or False.

1. A branch has separate legal authority from its owner.

2. For a business to be a subsidiary, it must be owned 100% by its

parent.

3. Some companies establish operations abroad as subsidiaries to

involve local investors.

21
Group Accounts
Many companies operate in groups. This is because they will be linked to
established brands with customer loyalty or prestige. Some businesses
will operate as groups to bring together different parts of the production
process.

For example, a manufacturer of electronic goods may buy the shares of

a major supplier of its components.

22
Example 2
Pamtish Co owns a subsidiary called Sassam Co and now prepares the
Consolidated Statement of Financial Position.

23
Example 2

24
Example 2
• Tangible non-current assets – The non-current assets (Property,
plant and equipment) in the SOFPs of Pamtish Co and Sassam Co are
added together.

• Goodwill – Goodwill is the difference between the fair value of

Pamtish Co’s investment in Sassam Co and the fair value of Sassam
Co’s net assets.

• Current Assets – The current assets in the SOFPs of Pamtish Co and

Sassam Co are added together.

• Share Capital – Only the share capital value of Pamtish Co is

reflected in the CSOFP, not Sassam Co‘s.

25
Example 2
• Retained Earnings – The retained earnings figure = Pamtish Co's
retained earnings + Pamtish Co's share of Sassam Co's retained
earnings after Pamtish Co acquired Sassam Co. (post-acquisition
profits).

• Non-Controlling Interest – Non-controlling interest is the share in

the group’s net assets that belong to Sassam Co's other shareholders.

• There is a separate subtotal before non-controlling interest to

emphasise how much of the group belongs to Pamtish Co and how
much to Sassam Co's other shareholders.

26
Example 2
• Non-current liabilities – The non-current liabilities in the SOFPs of
Pamtish Co and Sassam Co are added together.

• Current liabilities – The current liabilities in the SOFPs of Pamtish

Co and Sassam Co are added together.

27
Consolidated Statement of Financial Position (CSFP)
Steps to Prepare the CSFP

The steps to prepare the consolidated statement of financial position are

as follows:

28
Consolidated Statement of Financial Position (CSFP)
Steps to Prepare the CSFP

1. Total the Net Assets of the Group

The assets and liabilities of the parent and subsidiary are totalled. The
following adjustments are made to the assets and liabilities amount:

—Any amounts owed from/ to each other are deducted

—Adjust for inventory
—Adjust for any unrealised profit
—Adjust non-current assets to fair value if there are differences
between fair value and carrying amount.
29
Consolidated Statement of Financial Position (CSFP)
Steps to Prepare the CSFP

2. Include Parent’s Reserves

Only the parent’s share capital and share premium are included in
the CSFP.

3. Calculate Goodwill

Goodwill is the difference between the fair value of the parent’s

investment in the subsidiary and the fair value of the subsidiary’s net
assets.

30
Consolidated Statement of Financial Position (CSFP)
Steps to Prepare the CSFP

4. Non-Controlling Interest

The non-controlling interest is the subsidiary’s net assets that do not

belong to the parent company.

5. Retained Earnings

The retained earnings to be reflected in the CSFP are the parent's

retained earnings and the parent's share of the subsidiary's post-
acquisition retained earnings.

31
Example 3
Panna Co set up a subsidiary, Sesmond Co, on 1 January 20X1 and paid
cash into the subsidiary's bank account of $100,000 for Sesmond Co's
entire share capital of 100,000 $1 shares.

The SFP has been prepared for the year ended 31 December 20X1 as
follows:

32
Example 3

33
Example 3
This is a simple example where the parent company sets up (not
acquire) the subsidiary, which the parent owns wholly (100%).

In reality, parent companies may acquire subsidiaries that have been

trading for a while and not wholly, leading to a non-controlling
interest (NCI).

34
Consolidated Statement of Financial Position (CSFP)
Pre-Acquisition Reserves and Non-Controlling Interests

A parent company may acquire subsidiaries that have been trading for a
while. The determination of pre and post-acquisition retained earnings
must be established when preparing the consolidated statement of
financial position.

Parent companies may also acquire part (between 50% to 99%) of a

subsidiary, which leads to the existence of a non-controlling interest.

38
Consolidated Statement of Financial Position (CSFP)
Pre-Acquisition Reserves and Non-Controlling Interests

• Pre-Acquisition Retained Earnings

When a parent acquires a subsidiary, the subsidiary may already have
retained earnings in its SOFP.

The subsidiaries retained earnings should not be included in the

consolidated SOFP because it does not belong to the group. The
earnings were made before the subsidiary became part of the group and
are known as pre-acquisition profits.

39
Consolidated Statement of Financial Position (CSFP)
Pre-Acquisition Reserves and Non-Controlling Interests

The CSOFP should only include only the parent's share of post-
acquisition profits. It is calculated as:

Parent’s percentage of share capital x (Retained

Earnings at SOFP date – Retained Earnings when
subsidiary acquired)

This amount is then added to the parent’s retained earnings.

40
Exam Guidance

Exam advice

In the FA exam, students may be given a figure for post-

acquisition profits. This profit will be the profit for the
year if the subsidiary was acquired at the start of the
year.

41
Consolidated Statement of Financial Position (CSFP)
• Non-Controlling Interest
The non-controlling interest (NCI) is the share of the subsidiary's net
assets owned by shareholders in the subsidiary other than the parent. It
is shown as a separate figure as part of equity in the CSOFP. No
adjustment should be made to the assets and liabilities for the
proportion belonging to the NCI.

The non-controlling interest (NCI) to be presented in the CSFP is

calculated as follows:

Fair value of NCI at acquisition + NCI's share

of post-acquisition profits

42
Consolidated Statement of Financial Position (CSFP)
The Fair value of NCI at acquisition is calculated as follows:

Share price of the subsidiary at acquisition × Number of

shares held by NCI

The NCI's share of post-acquisition profits is calculated the same way as

the parent's share but applies the percentage of shares held by the NCI.

NCI’s percentage of share capital x (Retained Earnings at SOFP

date – Retained Earnings when subsidiary acquired)

43
Example 4 (Partially Acquired)
Pareq Co bought 75% of the share capital of Suan Co on 1 July 20X7. In
the year to 30 June 20X8, Suan Co made profits of $480,000. The fair
value of the non-controlling interest at acquisition was $350,000. There
was no goodwill arising on acquisition.

44
Example 4 (Partially Acquired)
The SFP has been prepared for the year ended 30 June 20X8 as follows:

Pareq Co Suan Co
$000 $000
ASSETS
Non-current assets
Tangible non-current assets 9,150 1,590
Investment in subsidiary 1,050 -
10,200 1,590
Current assets 3,720 510
Total assets 13,920 2,100

45
Example 4 (Partially Acquired)
The SFP has been prepared for the year ended 30 June 20X8 as follows:

Pareq Co Suan Co
$000 $000
EQUITY AND LIABILITIES
Equity
Share capital 1,000 200
Retained earnings 10,360 1,680
Total equity 11,360 1,880
Current liabilities 2,560 220
Total equity and liabilities 13,920 2,100

46
Example 4 (Partially Acquired)
The consolidated statement of financial position is as follows:

Pareq Group statement of financial

position as at 30 June 20X8
Group
$000
ASSETS
Non-current assets
Tangible non-current assets 10,740
Current assets 4,230
Total assets 14,970

47
Activity 3
Paisley Co purchased 80% of Stranraer Co's share capital on 1 January
20X2 for $4 per share. At that date, Stranraer Co's share capital was
500,000 $1 shares, and its retained earnings were $1,500,000. There
was no goodwill arising on acquisition.

The SFP has been prepared for the year ended 31 December 20X4 as
follows:

48
Activity 3
Prepare the consolidated SOFP for the Paisley Group at 31
December 20X4.

Paisley Co Stranraer
Co
$000 $000
ASSETS
Non-current assets
Tangible non-current assets 11,570 2,830
Investment in subsidiary 1,600 -
13,170 2,830
Current assets 4,440 1,340
Total assets 17,610 4,170

49
Activity 3
Prepare the consolidated SOFP for the Paisley Group at 31
December 20X4.

Paisley Co Stranraer
Co
$000 $000
EQUITY AND
LIABILITIES
Equity
Share capital 5,000 500
Retained earnings 9,050 2,850
Total equity 14,050 3,350
Current liabilities 3,560 820
Total equity and 17,610 4,170
liabilities

50
Consolidated Statement of Financial Position (CSFP)
Goodwill

When a parent acquires a subsidiary, it does not just acquire the

tangible assets and liabilities of the subsidiary; It also acquires
intangible assets such as the expertise and experience that are not
reflected in the subsidiary’s financial statements.

The additional premium the parent pays for this expertise, experience,
and other benefits is goodwill.

51
Key Point

Key point

Goodwill on consolidation represents the difference

between the value of the investment in the subsidiary and
its net asset’s fair value.
Goodwill on consolidation can only arise if a parent
acquires a subsidiary, it cannot arise if the parent sets up
a subsidiary.

52
Consolidated Statement of Financial Position (CSFP)
Goodwill

Goodwill arising on consolidation is included in the non-current asset

section of the consolidated Statement of Financial Position. However,
goodwill is not included in the parent's SOFP. The parent's SOFP shows
the cost of the investment in the subsidiary.

53
Consolidated Statement of Financial Position (CSFP)
Goodwill

The goodwill to be presented in the consolidated statement of financial

position is calculated as follows:

Fair value of consideration X

Fair value of non-controlling interest X
Less fair value of subsidiary’s net assets at acquisition (X)
Goodwill at acquisition X

54
Consolidated Statement of Financial Position (CSFP)
Goodwill

Goodwill is the premium paid for the subsidiary over the fair value of the
subsidiary's net assets acquired.

The premium is paid for the intangible worth the purchaser places on
the subsidiary it has bought. It may relate to a brand, deemed future
returns, expertise and experience of managers and staff in the
subsidiary. There may also be synergies the parent seeks to drive from
the acquisition, such as shared warehousing and finance departments.

55
Example 5
On 1 April 20X7, Ponsonby Co acquired 60% of the share capital of
Smythe Co for $4,500,000. The value of the non-controlling interest on
1 April 20X7 was $2,600,000. The share capital figure in Smythe Co's
financial statements at this date was $2,000,000, and its retained
profits were $3,240,000.

The goodwill is calculated as follows:

$000
Fair value of consideration
Fair value of non-controlling interest
Less fair value of net assets at acquisition

Goodwill at acquisition

56
Activity 4
On 1 September 20X7, Peterhead Co acquired 75% of the share capital
of Southtown Co for cash for $5.20 per share. At this date, Southtown
Co's share capital consisted of 500,000 $1 shares, and its retained
earnings were $1,890,000.

Calculate the goodwill on the acquisition of Southtown Co.

$000
Fair value of consideration
Fair value of non-controlling interest
Less fair value of net assets at acquisition
Goodwill at acquisition

57
Consolidated Statement of Financial Position (CSFP)
Fair Value Adjustments

One of the components of the goodwill calculation is the:

• Fair Value of Consideration

The fair value of cash consideration is the cash paid for the subsidiary's
shares. If the parent pays for the subsidiary's shares by exchanging its
shares for the subsidiary's shares, fair value would be calculated as
follows:

58
Consolidated Statement of Financial Position (CSFP)
Fair Value Adjustments

Fair Value = Number of parent's shares given × Market

price of parent's shares

The new share issue by the parent will increase its share capital and
share premium.

59
Consolidated Statement of Financial Position (CSFP)
Fair Value Adjustments

• Fair Value of Subsidiary’s Net Assets

The fair value of the subsidiary’s net assets may differ from their
carrying value in its financial statements. This fair value difference is
adjusted in the goodwill calculation.

The fair-value adjustment is also made to group non-current assets

when they are added together.

60
Exam Guidance

Exam advice

Only land and buildings are considered in the subsidiary’s

net assets in the FA exam.

61
Example 6
Potiskum Co acquired 100% of the share capital of Sokoto Co on 1
January 20X7. Sokoto Co exchanged three $0.50 shares in Potiskum Co,
valued at $2.50 each, for four $1 shares in Sokoto Co.

On 1 January 20X7, Sokoto Co had 1,200,000 $1 shares in issue and

retained profits of $570,000. Land and buildings included in Sokoto Co's
accounting records at $1,900,000 had a fair value of $2,180,000 on 1
January 20X7.

62
Example 6
The goodwill is calculated as follows:

$000
Fair value of consideration
Fair value of non-controlling interest
Less fair value of net assets at acquisition

Goodwill at acquisition

63
Activity 5
Pembridge Co purchased 80% of the share capital of Shobdon Co on 1
August 20X0.

The consideration was one share in Pembridge Co for one share in

Shobdon Co plus a cash payment of $0.30 per share. Pembridge Co has
five million $1 shares in issue, and Shobdon Co has one million $0.25
shares in issue. The market value of Pembridge Co shares on 1 August
20X0 was $1.80.

The fair value of the non-controlling interest in Shobdon Co on 1 August

20X0 was $310,000. Shobdon Co's net assets on its statement of
financial position on 1 August 20X0 were $1,650,000, but a valuation of
land and buildings at that date showed they were worth $250,000 more
than their carrying value in the statement of financial position.

64
Activity 5
Calculate the goodwill on the acquisition of Shobdon Co.

$000
Fair value of consideration
Fair value of non-controlling interest
Less fair value of net assets at acquisition
Goodwill at acquisition

65
Activity 6
On 1 January 20X5, Padiham Co acquired 80% of the share capital of
Salcombe Co for $2,090,000. The retained earnings of Salcombe Co
were $740,000 on that date, and the non-controlling interest was valued
at $630,000. Salcombe Co's share capital has remained the same since
the acquisition.

The following draft statements of financial position for the two

companies were prepared at 31 December 20X8.

66
Activity 6

Padiham Co Salcombe Co
$000 $000
ASSETS
Investment in Salcombe Co 2,090 -
Other assets 6,780 3,650
Total assets 8,870 3,650

EQUITY AND LIABILITIES

Equity
Share capital 3,200 1,500
Retained earnings 3,220 1,010
Total equity 6,420 2,510
Liabilities 2,450 1,140
Total equity and liabilities 8,870 3,650

67
Activity 6
1. What is the fair value of the consideration (Investment in Salcombe
Co held by Padiham Co)?
a) $630,000
b) $740,000
c) $1,010,000
d) $1,500,000
e) $2,090,000

68
Activity 6
2. What should be added below the FV of consideration in the goodwill
calculation?
a) Retained earnings
b) Equity share capital
c) NCI as at acquisition
d) Investment in Salcombe Co held by Padiham Co
e) Other assets

69
Activity 6
3. What is the value of the non-controlling interest at acquisition?
a) $630,000
b) $740,000
c) $1,010,000
d) $1,500,000
e) $2,090,000

70
Activity 6
4. What is the value of the equity share capital to be included in the FV
of the subsidiary’s net assets at acquisition?
a) $740,000
b) $1,010,000
c) $1,140,000
d) $1,500,000
e) $3,650,000

71
Activity 6
5. Other than the equity share capital amount, what else is included in
the calculation for the FV of the subsidiary’s net assets at
acquisition?
a) Other assets
b) Liabilities
c) Retained earnings

72
Activity 6
6. What is the value of the retained earnings?
a) $740,000
b) $1,010,000
c) $1,140,000
d) $1,500,000
e) $3,650,000

7. What is the total goodwill at acquisition?

73
Intra-Group Trading
According to IFRS 10 Consolidated Financial Statements, any balances
between the parent and the subsidiary must be cancelled on
consolidation.

• It is normal for group companies to trade with each other. For

example, a subsidiary may act as a supplier of raw materials to the
parent or as a distributor of finished goods from the parent.

• The parent and subsidiary’s financial statements may have monies

due to or from the other company.

These balances must be eliminated in the CSFP from the respective

receivables and payables totals so that the statement reflects only the
group’s receivables and payables.

74
Intra-Group Trading
Intercompany Receivables and Payables

Group member A owes money to group member B for purchasing goods

from B. The debt will be included in the receivables of group member B
(who sold the goods) and in the payables of group member A (who
bought the goods).

The balances owing from each group member need to be deducted from
the receivables and payables balance in the consolidated financial
statements.

75
Intra-Group Trading
Intercompany Receivables and Payables

The double entry to remove the receivables and payables in the CSFP is:

Individual Category Explanation

Account
DR Payables Liability Remove the payable
balance
Remove the receivable
CR Receivables Asset
balance

76
Example 7
Creditors of the parent company include $1,500 due to the subsidiary,
and creditors of the subsidiary include $1,000 due to the parent.

Parent Subsidiary Group

$ $ $
Current Assets
Receivables 2,000 1,500 (2,000 + 1,500) – 2,500 1,000

Current
Liabilities
Payables 3,500 2,500 (3,500 + 2,500) – 2,500 3,500

77
Example 7
The parent owes the subsidiary $1,500, so the balance is removed from
the group figure. The subsidiary owes the parent $1,000, so the balance
is removed from the group figure.

The total balance owed to each other is $1,500 + $1,000 = $2,500, and
the double entry to remove the balance in the SFP is DR Payables
$2,500 CR Receivables $2,500.

78
Intra-Group Trading
Intercompany Sales of Inventory

If group member C has sold goods to group member D for a profit and
those goods are still in the inventory of group member D at the SOFP
date, the profit is unrealised from the group's viewpoint.

Since the goods have not yet been sold outside the group, the
unrealised profit must be removed from the consolidated financial
statements.

79
Intra-Group Trading
Intercompany Sales of Inventory

If the parent sells goods to the subsidiary, the unrealised profit is

removed in the CSFP with the below double entry:

Individual Account Category Explanation

DR Parent’s Retained Equity Eliminate the unrealised

Earnings profit of the parent

Reduce the inventory

CR Closing Inventory Asset amount

80
Intra-Group Trading
Intercompany Sales of Inventory

If the subsidiary sells goods to the parent, the unrealised profit is

removed in the CSFP with the below double entry:

Individual Account Category Explanation

DR Parent’s % of Equity Eliminate the unrealised

Subsidiary’s Post profit of the subsidiary
Retained Earnings (parent %)
DR Non-Controlling Equity Eliminate the unrealised
Interest % profit of the subsidiary (NCI
%)
Reduce the inventory
CR Closing Inventory Asset
amount

81
Intra-Group Trading
Intercompany Sales of Inventory

The complication is that part of the unrealised profit belongs to the non-
controlling interest. It is deducted the same way the group's share of
the unrealised profit is removed from the group’s retained earnings.

82
Example 8
The following figures have been taken from the accounting records of
the Padstow Group. Padstow Co owns 80% of the share capital of
Saltash Co.

Padstow Co Saltash Co
$000 $000
Inventory 480 270
Receivables 600 220
Payables 420 180
Retained earnings 1,640 -
Padstow Group share of retained
- 1,230
earnings of Saltash Co
Non-controlling interest in Saltash
- 1,310
Co

83
Example 8
At year-end, Padstow Co owed Saltash Co $18,000 for the goods it had
purchased during the year. Padstow Co also had in inventory $15,000 of
goods it had purchased from Saltash Co. Saltash Co had made a 50%
markup on these goods.

Adjustment 1:

The intercompany trade leads to a receivable (subsidiary – Saltash Co)

and payables (parent – Padstow Co) of $18,000 that needs to be
removed. The double entry is

DR Payables $18,000

CR Receivables $18,000

84
Example 8
Adjustment 2:

The unrealised profit (URP) for the sale is $15,000 x 50/150% =

$5,000. Note that only the profit element is deducted, not the whole
inventory.

Since the unrealised profit is from the subsidiary’s sale to the parent,
the double entry is:

DR Subsidiary’s Post Retained 5,000 x $4,000

Earnings 80%
DR Non-Controlling Interest 5,000 x $1,000
20%
CR Closing Inventory $5,000

85
Example 8
The group CSFP should be as follows once the intercompany trading and
unrealised profits are adjusted:

Group
$000
Inventory (480 + 270) – 5 (Note 2) 745
Receivables (600 + 220) – 18 (Note 1) 802
Retained earnings (1,640 + 1,230) – 4 (Note 2) 2,866
Non-controlling interest in
Saltash Co 1,310 – 1 (Note 2) 1,309

Payables (420 + 180) – 18 (Note 1) 582

86
Activity 7
Petworth Co uses a different bank from Slindon Co.

1. What figure would be included for inventory in the Petworth Group

financial statements as at 31 December 20X8?

2. What figure would be included for receivables in the Petworth Group

financial statements as at 31 December 20X8?

3. What figure would be included for bank and cash in the Petworth
Group financial statements as at 31 December 20X8?

4. What figure would be included for payables in the Petworth Group

financial statements as at 31 December 20X8?

87
Mid-Year Acquisitions
So far, it has been assumed that acquisitions occur at the start of the
accounting period. In the real world, however, acquisitions can be made
at any time (mid-year).

The subsidiary’s retained earnings at the acquisition date must be

determined to calculate the goodwill on acquisition.

The consolidated financial statements include the subsidiary’s profits

after the acquisition only.

88
Mid-Year Acquisitions
Accounting for Mid-Year Acquisition

• Subsidiary’s Profits
Unless told otherwise, it can be assumed that the subsidiary's profits
accrue evenly over the period. For example, if the acquisition takes
place four months into the year, four months' profits will be pre-
acquisition profits, and eight months' profits will be post-acquisition
profits.

89
Mid-Year Acquisitions
Accounting for Mid-Year Acquisition

• Goodwill
The fair value of net assets at the date of acquisition is the subsidiary’s
opening share capital and reserves plus the profits from the start of the
year until the date of acquisition.

• Non-Controlling Interest
The value of non-controlling interest is the value at the start of the year
plus the value of the non-controlling interest's share in profits from the
beginning of the year up to the date of acquisition.

90
Mid-Year Acquisitions
Accounting for Mid-Year Acquisition

• Post-Acquisition Profits
Only add profits of the subsidiary made after the date of acquisition to
the group's retained earnings, not the profits for the whole year. Add the
non-controlling interest's share of profits after the acquisition to the
non-controlling interest at the date of acquisition.

91
Example 9
Powerstock Co acquired 80% of Sherborne Co's shares for $530,000 on
30 September 20X3. On 30 June 20X4, Powerstock Co's retained
earnings were $770,000. Sherborne Co's share capital on 30 June 20X3
was $200,000, and its retained earnings were $360,000. Sherborne Co
did not issue any shares for the year to 30 June 20X4.

Sherborne Co made $80,000 in profits in the year to 30 June 20X4. The

value of the non-controlling interest at the date of acquisition was
$140,000. Powerstock Co has a financial year-end of 30 June 20X4.

To calculate the goodwill and retained earnings to be included in the

CSFP, the pre and post-acquisition profits need to be determined:

92
Example 9
The pre-acquisition period is three months:

- pre-acquisition profits are ($80,000 x 3/12) = $20,000

- post-acquisition profits are ($80,000 x 9/12) = $60,000

93
Example 9
Calculate the Goodwill:

The FV of Sherborne Co’s net asset at acquisition = Opening Share

Capital $200,000 + Pre-acquisition Profits (Opening 360,000 + during
the year $20,000) = $580,000.

$000
Fair value of consideration 530
Fair value of non-controlling interest 140
Less: Fair value of net assets at acquisition (580)
Goodwill at acquisition 90

94
Example 9
Calculate the Retained Earnings:

The total retained earnings is Powerstock’s RE $770,000 + Powerstock’s

share of Sherborne Co’s post-acquisition profit (80% x $60,000)
$48,000 = $818,000

95
Activity 8 (Full Working CSFP)
The following activity is presented in the style of the computer-based
ACCA exam.

Pontesbury Co acquired 70% of the share capital of Stokesay Co on 1

April 20X3. The share capital of Stokesay Co was 1,800,000 $1 shares,
and Pontesbury Co offered five $0.50 of its shares for every three
shares in Stokesay Co.

The market price per share of Pontesbury Co's shares on 1 April 20X3
was $1.20, and the fair value of the non-controlling interest on the date
of acquisition was $710,000.

96
Activity 8 (Full Working CSFP)
Extracts from the statements of financial position for the two companies
as at 31 March 20X4 are as follows:

Pontesbury Co Pontesbury Co Stokesay Co

$000 $000 $000
Inventory 750 240
Trade receivables 670 190

Retained earnings 5,470 1,420

Trade payables 480 230

97
Activity 8 (Full Working CSFP)
On 31 March 20X4, Stokesay Co had goods in inventory that it had
purchased from Pontesbury Co for $50,000. Pontesbury Co charges a
25% markup on cost. Pontesbury Co had goods in inventory purchased
from Stokesay Co for $100,000. Stokesay Co has a profit margin of
20%. At the year-end, Pontesbury Co owed Stokesay Co $30,000 for
goods that Pontesbury Co had purchased.

Stokesay Co's profit for the year to 31 March 20X4 was $150,000. No
adjustments have been made to retained earnings or non-controlling
interest for intra-company trading.

98
Activity 8 (Full Working CSFP)
Complete the calculation of the goodwill on the acquisition of
Stokesay Co.

$000

Goodwill at acquisition

99
Activity 8 (Full Working CSFP)
Complete the consolidated SOFP by entering the missing
numbers.

Extracts from Pontesbury Group consolidated

statement of financial position as at 31 March 20X4
$000
Inventory
Trade receivables
Retained earnings
Non-controlling interest
Trade payables

100
Activity 9 (Full Working CSFP)
The following activity is presented in the style of the paper-based ACCA
exam.

Pagham Co acquired 80% of the share capital of Sidlesham Co on 30

September 20X0. The accounting year end of both companies is 31
December.

Pagham Co exchanged one $1 share in Pagham Co plus a cash payment

of $0.30 for one share in Sidlesham Co. On 30 September 20X0, the
price of Pagham Co shares was $1.50. Sidlesham Co's share capital
throughout 20X0 was 2 million $1 shares and its profit for the year was
$280,000.

101
Activity 9 (Full Working CSFP)
The fair value of Sidlesham Co's land and buildings on 30 September
was $250,000 more than the value shown in Sidlesham Co's accounting
records.

The fair value of the non-controlling interest at the date of acquisition

was $810,000.

Pagham Co and Sidlesham Co’s statements of financial position as at 31

December 20X0 are as follows:

102
Activity 9 (Full Working CSFP)

Pagham Co Sidlesham Co
$000 $000
ASSETS
Non-current assets
Tangible non-current assets 18,740 3,110
Investment in subsidiary 2,880 -
21,620 3,110
Current assets 3,320 640
Total assets 24,940 3,750
EQUITY AND LIABILITIES
Equity
Share capital 6,600 2,000
Share premium 1,280 -
Retained earnings 14,570 1,370
Total equity 22,450 3,370
Current liabilities 2,490 380
Total equity and liabilities 24,940 3,750

103
Activity 9 (Full Working CSFP)

Prepare the consolidated statement of financial position for the

Pagham Group for the year ended 31 December 20X0.

104
Activity 10 (Full Working CSFP)

Pickering Co acquired 70% of the share capital of Skipton Co on 30 June

20X4 for $2 per share. At that date, Skipton Co had two million $1
shares in issue and had retained earnings of $1,460,000. Land and
buildings shown in Skipton Co's accounting records on 30 June 20X4
for $3,200,000 were valued at $3,340,000.

On 31 March 20X5, Pickering Co owed Skipton Co $200,000 for goods it

had purchased from Skipton Co during February 20X5. 50% of those
goods were still in Pickering Co's inventory on 31 March 20X5. Skipton
Co makes a markup of 25% on the goods that it sells.

105
Activity 10 (Full Working CSFP)

The statements of financial position for Pickering Co and Skipton Co on

31 March 20X5 were as follows:

Pickering Co Skipton Co
$000 $000
ASSETS
Non-current assets
Tangible non-current assets 8,920 3,780
Investment in subsidiary 2,800 -
11,720 3,780
Current assets 1,110 450
Total assets 12,830 4,230

106
Activity 10 (Full Working CSFP)

The statements of financial position for Pickering Co and Skipton Co on

31 March 20X5 were as follows:

Pickering Co Skipton Co
$000 $000
EQUITY AND LIABILITIES
Equity
Share capital 5,000 2,000
Retained earnings 6,890 1,820
Total equity 11,890 3,820
Current liabilities 940 410
Total equity and liabilities 12,830 4,230

Prepare the consolidated statement of financial position for the

Pickering Group for the year ended 31 March 20X5.
107
The end
Part 1