CHAPTER 17: Visual Overview

Objective: To explain the acquisition method of consolidation.

 1.1 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.
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.

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.
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
 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.

1.1.1 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.
• 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
• 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:
o power over the investee
o exposure, or rights, to variable returns from its involvement with
the investee
o the ability to use its power over the investee to affect the amount
of the investor's returns.
• 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.
• 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.

1.1.2 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.
• 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
• 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.
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%. 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.

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.

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.
*Please use the notes feature in the toolbar to help formulate your answer.
1. False. A subsidiary company has separate legal authority from its owner; a branch of
a parent does not. A branch is a part of the parent company which provides the same
services in a different location from the parent company. Subsidiaries are run and
controlled by other companies.
 2. False. The definition is of a wholly owned subsidiary; not all subsidiaries are wholly
owned.
3. True. The companies may want to involve local investors anyway or may be required
to by local law.
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.

2.1 Preparing the Consolidated SFP

2.1.1 Format of CSFP

Example 2

Pamtish Co owns a subsidiary called Sassam Co and now prepares the Consolidated Statement of
Financial Position.
 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.
 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.
• 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.
2.1.2 Steps to Prepare the CSFP
The steps to prepare the consolidated statement of financial position are as follows
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.
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.
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.

Example 3 (Wholly Owned)

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:
 Example 3 (Wholly Owned)

Panna Co Sesmond Co

$’000 $’000

ASSETS

Non-current assets

Tangible non-current assets 3,500 950

Investment in subsidiary 100

3,600 950

Current assets 750 290

Total assets 4,350 1,240

EQUITY AND LIABILITIES

Equity

Share capital 1,000 100

Retained earnings 2,900 960

Total equity 3,900 1,060

Current liabilities 450 180

Total equity and liabilities 4,350 1,240

From the available SOFP figures above, the following steps are made to prepare the consolidated
 Example 3 (Wholly Owned)

CSOFP.
1. Add the Assets and Liabilities:
Tangible Non-current assets are $3,500 + $950 = $4,450
Current Assets are $750 + $290 = $1,040
Current liabilities are $450 + $180 = $630
2. Insert parent’s share capital of $1,000
3. Calculate Goodwill
Goodwill is nil in this scenario as shares were acquired at cost.
4. Calculate Non-Controlling Interest (NCI)
There is no NCI as Panna Co owns 100% of the subsidiary, Sesmond Co.
5. Calculate Reserves:
The parent’s retained earnings are $2,900.
The parent's share of subsidiary's post-acquisition retained earnings = 100% × $960 =
$960
The total retained earnings to be reflected in the CSOFP is $2,900 + $960 = $3,860
The consolidated statement of financial position is as follows:

Panna Co Sesmond Co Group

$’000 $’000 $’000

ASSETS ASSETS

Non-current assets Non-current assets

Tangible non-current assets 3,500 950 Tangible non-current assets 4,450

Investment in subsidiary 100 Investment in subsidiary

3,600 950 4,450

Current assets 750 290 Current assets 1,040

Total assets 4,350 1,240 Total assets 5,490

EQUITY AND LIABILITIES EQUITY AND LIABILITIES

Equity Equity
 Example 3 (Wholly Owned)

Share capital 1,000 100 Share capital 1,000

Retained earnings 2,900 960 Retained earnings 3,860

Total equity 3,900 1,060 Total equity 4,860

Current liabilities 450 180 Current liabilities 630

Total equity and liabilities 4,350 1,240 Total equity and liabilities 5,490

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.

Activity 2

Passan Co set up a new subsidiary, Sinta Co, in a neighbouring country on 1 April 20X5.
It contributed $500,000 for all of Sinta Co's one million $0.50 shares. Passan Co and
Sinta Co statements of financial position as at 31 March 20X6:

Panna Co Sinta Co

$’000 $’000

ASSETS

Non-current assets

Tangible non-current assets 7,150 3,420

Investment in subsidiary 500

 Example 3 (Wholly Owned)

7,650 3,420

Current assets 1,980 1,230

Total assets 9,630 4,650

EQUITY AND LIABILITIES

Equity

Share capital 2,000 500

Retained earnings 6,530 3,590

Total equity 8,530 4,090

Current liabilities 1,100 560

Total equity and liabilities 9,630 4,650

Prepare the consolidated SOFP for the Passan Group at 31 March 20X6.
*Please use the notes feature in the toolbar to help formulate your answer.

Panna Co Sinta Co Group

$’000 $’000 $’000

ASSETS ASSETS

Non-current assets Non-current assets

Tangible non-current assets 7,150 3,420 Tangible non-current assets 10,570

 Example 3 (Wholly Owned)

Investment in subsidiary 500 Investment in subsidiary

7,650 3,420 10,570

Current assets 1,980 1,230 Current assets 3,210

Total assets 9,630 4,650 Total assets 13,780

EQUITY AND LIABILITIES EQUITY AND LIABILITIES

Equity Equity

Share capital 2,000 500 Share capital 2,000

Retained earnings 6,530 3,590 Retained earnings 10,120

Total equity 8,530 4,090 Total equity 12,120

Current liabilities 1,100 560 Current liabilities 1,660

Total equity and liabilities 9,630 4,650 Total equity and liabilities 13,780

2.1.3 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.
• 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.
The CSOFP should only include only the parent's share of post-acquisition profits.
 Example 3 (Wholly Owned)

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.

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.

• 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

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)

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.
The SFP has been prepared for the year ended 30 June 20X8 as follows:

Pareq Co Suan Co

$ '000 $ '000
 Example 3 (Wholly Owned)

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

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

 Example 3 (Wholly Owned)

From the available SOFP figures above, the following steps are made to prepare the consolidated
CSOFP.
1. Add the Assets and Liabilities:
Tangible Non-current assets are $9,150 + $1,590 = $10,740
Current Assets are $3,720 + $510 = $4,230
Current liabilities are $2,560 + $220 = $2,780
2. Insert parent’s share capital of $1,000
3. Calculate Goodwill: The scenario mentions that goodwill is nil.
4. Calculate Non-Controlling Interest (NCI)
5. NCI at acquisition $350 + NCI Share of post-acquisition profits (25% × $480) = $470
6. Calculate Reserves:
Parent’s reserves $10,360 + Parent's share of post-acquisition reserves (75% × $480) = $10,720
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

 Example 3 (Wholly Owned)

EQUITY AND LIABILITIES

Equity

Share capital 1,000

Retained earnings 10,720

11,720

Non-controlling interest 470

Total equity 12,190

Current liabilities 2,780

Total equity and liabilities 14,970

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:

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

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 liabilities 17,610 4,170

Prepare the consolidated SOFP for the Paisley Group at 31 December 20X4.
*Please use the notes feature in the toolbar to help formulate your answer.

Paisley Group statement of financial position as at 31 December 20X4

 Group

$ '000

ASSETS

Non-current assets

Tangible non-current assets 14,400

Current assets 5,780

Total assets 20,180

EQUITY AND LIABILITIES

Equity

Share capital 5,000

Retained earnings 10,130

10,130

Non-controlling interest 670

Total equity 10,800

Current liabilities 4,380

Total equity and liabilities 10,800

 NCI = NCI at acquisition (20% × $4 × 500 shares) + NCI share of post-acquisition
earnings 20% × (2,850 − 1,500) = $670
Reserves = Paisley reserves $9,050 + Paisley share of Stranraer's post-acquisition
earnings 80% × ($2,850 − $1,500) = $10,130
2.1.4 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.

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.

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.
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

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.
 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 4,500

Fair value of non-controlling interest 2,600

Less fair value of net assets at acquisition (5,240)

(share capital 2,000 + retained earnings 3,240)

Goodwill at acquisition 1,860

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

*Please use the notes feature in the toolbar to help formulate your answer.

$’000

Fair value of consideration 1,950

Fair value of non-controlling interest 650

Less fair value of net assets at acquisition (2,390)

(share capital 500 + retained earnings 1,890)

Goodwill at acquisition 210

2.1.5 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:
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.
• 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.
Exam advice

Only land and buildings are considered in the subsidiary’s net assets in the FA exam.
 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.
The goodwill is calculated as follows:

$’000

Fair value of consideration 2,250

Fair value of non-controlling interest -

Less fair value of net assets at acquisition (2,050)

(Share capital 1,200 + retained earnings 570 + FV adjustment on land & building 280)

Goodwill at acquisition 200

The fair value of consideration is the investment in Sokoto Co held by Potiskum Co. Potiskum Co gives
three shares in exchange for four in Sokoto Co.
The FV of consideration is 1,200,000 shares × 3/4 × $2.50 = $2,250,000
The FV adjustment of land and buildings is $2,180,000 − $1,900,000 = $280,000

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.
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

*Please use the notes feature in the toolbar to help formulate your answer.

$’000

Fair value of consideration 1,680

(80% × $1.80 × 1,000) + (80% × $0.30 × 1,000)

Fair value of non-controlling interest 310

Less fair value of net assets at acquisition (1,900)

(Net Asset Value 1,650 + FV adjustment 250)

Goodwill at acquisition 90

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.

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

1. What is the fair value of the consideration (Investment in Salcombe Co held by

Padiham Co)?
1. $630,000
2. $740,000
3. $1,010,000
4. $1,500,000
5. $2,090,000
2. What should be added below the FV of consideration in the goodwill
calculation?
1. Retained earnings
2. Equity share capital
3. NCI as at acquisition
4. Investment in Salcombe Co held by Padiham Co
5. Other assets
3. What is the value of the non-controlling interest at acquisition?
 1. $630,000
2. $740,000
3. $1,010,000
4. $1,500,000
5. $2,090,000
4. What is the value of the equity share capital to be included in the FV of the
subsidiary’s net assets at acquisition?
1. $740,000
2. $1,010,000
3. $1,140,000
4. $1,500,000
5. $3,650,000
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?
1. Other assets
2. Liabilities
3. Retained earnings
6. What is the value of the retained earnings?
1. $740,000
2. $1,010,000
3. $1,140,000
4. $1,500,000
5. $3,650,000
7. What is the total goodwill at acquisition?
*Please use the notes feature in the toolbar to help formulate your answer.

2.2 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.

2.2.1 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.
The double entry to remove the receivables and payables in the CSFP is:

Individual Account Category Explanation

DR Payables Liability Remove the payable balance

CR Receivables Asset Remove the receivable balance

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

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.
 2.2.2 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.
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 Earnings Equity Eliminate the unrealised profit of the parent

CR Closing Inventory Asset Reduce the inventory amount

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 Subsidiary’s Post Equity Eliminate the unrealised profit of the

Retained Earnings subsidiary (parent %)

DR Non-Controlling Interest % Equity Eliminate the unrealised profit of the

subsidiary (NCI %)

CR Closing Inventory Asset Reduce the inventory amount

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.

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.
 Example 8

Padstow Co Saltash Co

$ '000 $ '000

Inventory 480 270

Receivables 600 220

Payables 420 180

Retained earnings 1,640 -

Padstow Group share of retained earnings of Saltash Co - 1,230

Non-controlling interest in Saltash Co - 1,310

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

Adjustment 2:
The unrealised profit (URP) for the sale is $15,000 × 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 Earnings 5,000 × 80% $4,000

 Example 8

DR Non-Controlling Interest 5,000 × 20% $1,000

CR Closing Inventory $5,000

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

Activity 7

Petworth Co owns 80% of the share capital of Slindon Co. The current assets and
liabilities of the two companies at 31 December 20X8 were as follows:

Petworth Co Slindon Co

$ '000 $ '000

Current assets

Inventory 670 320

 Receivables 540 330

Bank and cash 240

1,450 670

Current liabilities

Payables 450 290

Bank overdraft – 140

450 430

In 20X8, Petworth Co sold goods that cost Petworth Co $70,000 to Slindon Co at a

profit margin of 30%. At year-end, 40% of these goods remained in Slindon Co's
inventory. Slindon Co had not yet paid for goods sold that were 25% of the value of
20X8 sales by Petworth Co to Slindon Co.
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?
*Please use the notes feature in the toolbar to help formulate your answer.
1. The sales to Slindon Co for the year = $70,000 × (100/70) = $100,000
Sales Revenue $10,000 = Cost $70,000 + Profit Margin $30,000
The unsold inventory is $100,000 × 40% = $40,000 and the unrealised profit
is $40,000 × 30% = $12,000
Therefore, the total inventory is ($670,000 + $320,000) − $12,000 = $978,000
2. From question 1, the sales revenue has been determined to be $100,000. The
amount owed at year-end is $100,000 × 25% = $25,000
Therefore, the total receivables is ($540,000 + $330,000) − $25,000
= $845,000
3. Petworth Co and Slindon Co are separate legal entities and use different banks.
Therefore, Petworth Co's positive bank balance should not be offset against Slindon
Co's overdraft. The bank and cash amount to be included in the CSFP is $240,000
 4. From question 2, the intercompany receivables (and payables) have been
determined to be $25,000.
Therefore, the total payables is ($450,000 + $290,000) − $25,000 = $715,000

2.3 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.

2.3.1 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.
• 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.
• 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.
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.
 Example 9

To calculate the goodwill and retained earnings to be included in the CSFP, the pre and post-acquisition
profits need to be determined:
The pre-acquisition period is three months:
• pre-acquisition profits are ($80,000 × 3/12) = $20,000
• post-acquisition profits are ($80,000 × 9/12) = $60,000
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

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
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.
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

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.
Complete the calculation of the goodwill on the acquisition of Stokesay Co.
$’000

Goodwill at acquisition

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

*Please use the notes feature in the toolbar to help formulate your answer.

$’000

Fair value of consideration 2,520

1,800 × (5/3) × 1.20 × 70%

Fair value of non-controlling interest 710

Less: Fair value of net assets at acquisition (3,070)

SC 1,800 + RE (1,420 − 150)

Goodwill at acquisition 160

Extracts from Pontesbury Group consolidated statement of financial position as at 31

March 20X4

$
'000

Inventory 750 + 240 − (50 × 25/125) − (100 × 20/100) 960

Trade receivables 670 + 190 − 30 830

Retained earnings
(Pontesbury RE 5,470 + Share of Stokesay’s post-acq RE (70% × 150) − 5,551
Interco trading adjustments [(50 × 25/125) + (70% × 100 × 20/100)]

Non-controlling interest 749

 (FV at acq 710 + Share of Stokesay’s post-acq RE (30% × 150) − Unrealised
profit adjustment (30% × 100 × 20/100)

Trade payables 480 + 230 − 30 680

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.
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:

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

Prepare the consolidated statement of financial position for the Pagham Group
for the year ended 31 December 20X0.
*Please use the notes feature in the toolbar to help formulate your answer.
1. Add the Assets and Liabilities:
Non-current assets fair value = 18,740 + 3,110 + 250 = 22,100
Current assets = 3,320 + 640 = 3,960
Current Liabilities = 2,490 + 380 = 2,870
2. Insert parent’s reserves:
Share capital = 6,600
Share premium = 1,280
3. Calculate Goodwill:
FV of Sidlesham Co’s net asset at acquisition = Opening Share Capital 2,000
+ Pre-acquisition Profits [1,370 − (280 × 3/12)] = 3,300
FV adjustment on land and building = 250
Total FV of Sidlesham’s net assets at acquisition = 3,300 + 250 = 3,550
$’000

Fair value of consideration 2,880

2 mil × 80% × (1.5 + 0.3)
 Fair value of non-controlling interest 810

Less: Fair value of net assets at acquisition (3,550)

Goodwill at acquisition 140

4. Calculate Non-Controlling Interest (NCI)

Value at acquisition 810 + Share of profits for three months to 31 December
(280 × 20% × 3/12) = 824
5. Calculate Retained Earnings:
The parent’s retained earnings are 14,570
The parent's share of subsidiary's post-acquisition retained earnings = 80% ×
280 × 3/12) = 56
The total retained earnings to be reflected in the CSOFP is 14,570 + 56
= 14,626
Pagham Group consolidated statement of financial position as at 31 December 20X0:
$'000

ASSETS

Non-current assets

Tangible non-current assets 22,100

Goodwill 140

22,240

Current assets 3,960

Total assets 26,200

EQUITY AND LIABILITIES

Equity
 Share capital 6,600

Share premium 1,280

Retained earnings 14,626

22,506

Non-controlling interest 824

Total equity 23,330

Current liabilities 2,870

Total equity and liabilities 26,200

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.
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

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.
*Please use the notes feature in the toolbar to help formulate your answer.
1. Add the Assets and Liabilities:
Tangible NCA adjustment = 3,340 − 3,200 = 140
Tangible NCA fair value = 8,920 + 3,780 + 140 = 12,840
Current assets adjust for receivables and inventory:
Provision for unrealised profit = 200 × 50% × 25/125 = 20
 Current assets = 1,110 + 450 − 200 − 20 = 1,340
Current liabilities = 940 + 410 − 200 = 1,150
2. Insert parent’s share capital = 5,000
3. Calculate Goodwill:
FV of Skipton Co’s net asset at acquisition = Opening Share Capital 2,000 +
Pre- acquisition Profits 1,460 = 3,460
FV adjustment on land and building = 140
Total FV of Sidlesham’s net assets at acquisition = 3,460 + 140 = 3,600
$’000

Fair value of consideration 2,800

2,000 × 70% × $2

Fair value of non-controlling interest 1,200

2,000 × 30% × $2

Less: Fair value of net assets at acquisition (3,600)

Goodwill at acquisition 400

4. Calculate Non-Controlling Interest (NCI)

Value at acquisition 1,200 + Share of profits after 30 June X4 [30% × (1,820 −
1,460)] − Share of unrealised profits (30% × 20) = 1,302
5. Calculate Retained Earnings:
Parent’s retained earnings are 6,890
Parent's share of subsidiary's post-acquisition retained earnings = 70% ×
(1,820 − 1,460) = 252
Parent’s share of unrealised profits = 70% × 20 = 14
The total retained earnings to be reflected in the CSOFP is 6,890 + 252 + 14
= 7,128
Pickering Group consolidated statement of financial position as at 31 March 20X5:
$ '000

ASSETS

Non-current assets

Tangible non-current assets 12,840

Goodwill 400
 13,240

Current assets 1,340

Total assets 14,580

EQUITY AND LIABILITIES

Equity

Share capital 5,000

Retained earnings 7,128

12,128

Non-controlling interest 1,302

Total equity 13,430

Current liabilities 1,150

Total equity and liabilities 14,580

3.1 Preparing the Consolidated SPL

3.1.1 Format of CSPL

Exam advice

FA Financial Accounting (FA) requires no other comprehensive income regarding group statements.
 Example 10

Penzance Co owns a subsidiary called Scarborough Co and now prepares the

Consolidated Statement of Profit or Loss.

Penzance Group consolidated statement of profit or loss for the year ended 31 December 20X3

$'000

Revenue 8,150

Cost of sales (5,790)

Gross profit 2,360

Other income 40

Distribution costs (680)

Administrative expenses (740)

Finance costs (40)

Profit before tax 940

Income tax expense (210)

Profit for the year 730

Profit attributable to:

 Example 10

Owners of Penzance 690

Non-controlling interest 40

Profit for the year 730

• Revenue – Revenues for Penzance Co and Scarborough Co are added together. Any revenue from
sales between them (intercompany trade) is deducted.
• Cost of Sales – The cost of sales for Penzance Co and Scarborough Co are added together. Any sales
value between them (as this is the cost of the sales for the company that has purchased the goods) is
deducted.
Adjust (deduct) any provisions made for unrealised profit in the closing inventory. This will lead
to lower closing inventory figures and higher cost of sales.
• Other Income – Other income must exclude any dividends the subsidiary pays the parent.
• Expenses – Sum the parent’s and subsidiary’s figures for distribution, administrative, finance, and
income tax expenses.
Note: The tax implications of intra-group sales are ignored as it is outside the scope of the
syllabus.
• Owners of Penzance – The equity owners (parent) of Penzance (subsidiary) value is = Penzance‘s
(parent) profit + Penzance Co's share of Scarborough Co's profit − Penzance Co's share of provision for
unrealised profit on closing inventory
• Non-Controlling Interest (NCI) – The NCI value is = NCI's share of Scarborough Co's profit − NCI's
share of provision for unrealised profit on closing inventory (when subsidiary sells to parent)
• Profit for the Year – This is the group’s entire profit.

3.1.2 Steps to Prepare the CSPL

1. Determine the date of the Acquisition
If the date of acquisition is at the start of the financial year, the subsidiary figures are
included in the CSPL entirely.
If the subsidiary is acquired partway through the year, the subsidiary figures are pro-
rated before being included in the CSPL.
2. Revenue and Cost of Sale
The revenue and cost of sales need to be adjusted for any unrealised profits on closing
inventory.
Revenue = Parent’s revenue + S’s revenue − Intergroup sales
Cost of Sales = Parent’s COS + Subsidiary’s COS − Intergroup sales + Unrealised
profits
3. Other figures in the SPL
Add the rest of the figures for the parent and subsidiary in the statement of profit or loss
and deduct any dividends paid by the subsidiary to the parent from other income.
4. Share of Profit
Split profit for the year between the parent and the non-controlling interest (NCI).

Example 11

Patterdale Co acquired 80% of the share capital of Seathwaite Co on 1 January 20X7.

There was no intra-group trading during 20X7.
Patterdale Co and Seathwaite Co statements of profit or loss for the year ended 31 December 20X7:

Patterdale Co Seathwaite Co

$ '000 $ '000

Revenue 8,170 1,230

Cost of sales (6,120) (810)

Gross profit 2,050 420

Other operating expenses (890) (250)

Profit before tax 1,160 170

Income tax expense (270) (40)

Profit for the year 890 130

From the available SOFP figures above, the following steps are made to prepare the consolidated
CSOFP.
1. Determine the date of acquisition:
The subsidiary, Seathwaite Co, is acquired at the start of the financial period.
Therefore, there is no pro-rate of Seathwaite’s figures for the CSPL.
2. Revenue and Cost of Sale:
There is no intra-group trading after the date of acquisition.
Revenue = 8,170 + 1,230 = 9,400
 Example 11

Cost of Sales = 6,120 + 810 = 6,930

3. Other figures in the SPL:
There is no mention of dividends paid from Seathwaite to Patterdale Co.
Add the other figures in the SPL together.
4. Share of Profit:
Patterdale's share = Patterdale Co's profits 890 + Patterdale Co's share of Seathwaite
Co's profits (80% × 130) = 994
NCI's share = 20% × 130 = 26
The Consolidated Statement of Profit or Loss is as follows:

Consolidated

$ '000

Revenue 9,400

Cost of sales (6,930)

Gross profit 2,470

Other operating expenses (1,140)

Profit before tax 1,330

Income tax expense (310)

Profit for the year 1,020

Profit attributable to:

Equity owners of Patterdale Co 994

Non-controlling interest 26
 Example 11

Profit for the year 1,020

Activity 11

Pooleybridge Co acquired 60% of the share capital of Seatoller Co on 1 January 20X9.

There was no intra-group trading.
Pooleybridge Co and Seatoller Co statements of profit or loss for the year ended 31
December 20X9:

Pooleybridge Co Seatoller Co

$ '000 $ '000

Revenue 6,730 2,490

Cost of sales (4,370) (1,240)

Gross profit 2,360 1,250

Other operating expenses (770) (450)

Profit before tax 1,590 800

Income tax expense (840) (320)

Profit for the year 750 480

Prepare the consolidated SPL for the Pooleybridge Group for the year to 31
December 20X9.
*Please use the notes feature in the toolbar to help formulate your answer.

From the available SOFP figures above, the following steps are made to prepare the
consolidated CSOFP.
1. Determine the date of acquisition:
The subsidiary, Seatoller Co, is acquired at the start of the financial period.
 Therefore, there is no pro-rate of Seatoller Co’s figures for the CSPL.
2. Revenue and Cost of Sale:
There is no intra-group trading after the date of acquisition.
Revenue = 6,730 + 2,490 = 9,220
Cost of Sales = 4,370 + 1,240 = 5,610
3. Other figures in the SPL:
There is no mention of dividends paid from Seatoller Co to Pooleybridge Co.
Add the other figures in the SPL together.
4. Share of Profit:
Pooleybridge's share = Pooleybridge Co's profits 750 + Pooleybridge Co's
share of Seatoller Co's profits (60% × 480) = 1,038
NCI's share = 40% × 480 = 192
The Consolidated Statement of Profit or Loss is as follows:
Consolidated

$ '000

Revenue 9,220

Cost of sales (5,610)

Gross profit 3,610

Other operating expenses (1,220)

Profit before tax 2,390

Income tax expense (1,160)

Profit for the year 1,230

Profit attributable to:

Equity owners of Pooleybridge Co 1,038

Non-controlling interest 192

 Profit for the year 1,230

3.2 Intra-Group Trading

Just as intra-group balances in the statement of financial position must be eliminated on

consolidation, so too the effects of all intra-group trading must be removed from the
consolidated statement of profit or loss.
• If the parent sells goods to the subsidiary (or vice versa), those sales must be
eliminated so that the consolidated profit or loss reflects only those sales (and
purchases) transacted with external parties.
• To cancel intra-group sales, the total amount of all intra-group sales is deducted from
both consolidated revenue and costs of sales. (The seller’s revenue will be the
buyer’s purchase price.)

3.2.1 Intercompany Sales of Inventory

The sales price is deducted from the revenue and the cost of sales. The double entry to
remove the intercompany sales is:

Individual Account Category Explanation

DR Revenue Income Revenue is deducted by the sale amount

CR Cost of Sales Expense COS is deducted by the sale amount

Any unrealised profit (URP) will also be removed from the closing inventory portion of
the cost of sale. The double entry to account for the unrealised profit is:

Individual Category Explanation

Account

DR Cost of Sales Equity Closing inventory reduces, which increases the cost
of sales (expense)

CR Closing Asset Reduce the closing inventory

Inventory

• Profit Attributable to Owners

 o For goods sold from parent to subsidiary: Deduct the sale’s
unrealised profit
o For goods sold from subsidiary to parent: Deduct the parent’s
share of the unrealised profit
• Profit Attributable to Non-Controlling Interest (NCI)
o For goods sold from parent to subsidiary: No adjustment
o For goods sold from subsidiary to parent: Deduct NCI’s share of
the unrealised profit

3.2.2 Dividends Paid from Subsidiary to Parent

The parent acquires the subsidiary by purchasing a majority of the subsidiary’s ordinary
shares. This may result in the parent (owners) being paid dividends.
In the individual parent’s SPL, the dividends paid are recorded. However, per IFRS 10
Consolidated Financial Statements, the dividend paid from the subsidiary to the parent
must be removed when preparing the consolidated SPL.
The double entry to account for the dividend paid from the subsidiary is:

Individual Account Category Explanation

DR Other/Dividend Income Income Dividend Income is removed

CR Retained Earnings Equity Dividends are paid out of the RE. Thus, the reversal

is to the same account.

 Example 12

The following figures have been taken from the accounting records of the Pokesdown Group for the year
ended 31 March 20X8. Pokesdown Co purchased 75% of the share capital of Southbourne Co on 1 April
20X7.

Pokesdown Co Southbourne Co

$ '000 $ '000

Revenue 5,740 3,120

Cost of sales 3,030 1,450

Profit for the year 730 380

During the year to 31 March 20X8, Pokesdown Co purchased goods for $120,000 from Southbourne Co
and had $40,000 of these goods in inventory at 31 March 20X8. Southbourne Co has a 25% markup on
the goods it sells to Pokesdown Co.
Southbourne Co purchased goods for $300,000 from Pokesdown Co and had $80,000 of these goods in
inventory at the year’s end. Pokesdown Co makes a 20% profit margin on the goods it sells to
Southbourne Co.
From the available SOFP figures above, the following steps are made to prepare the consolidated
CSOFP.
1. Determine the date of acquisition:
The subsidiary is acquired at the start of the financial period. Therefore, there is no pro-rate of
the subsidiary’s figures for the CSPL.
2. Revenue and Cost of Sale:
There are intra-group sales of 120 (P to S) and 300 (S to P).
There is an unrealised profit (URP) of (80 × 20/100) + (40 × 25/125) = 24
Revenue = Pokesdown 5,740 + Southbourne 3,120 − Intragroup sales (120 + 300) = 8,440
Cost of Sales = Pokesdown 3,030 + Southbourne 1,450 − Intragroup sales (120 + 300) + UPR
24 = 4,084
3. Other figures in the SPL:
There is no mention of dividends paid from the subsidiary to the parent company. Add the other
figures in the SPL together.
4. Profit Attributable to owners of Pokesdown Co:
Pokesdown profit = 730
Pokesdown’s share of Southbourne’s profit (75% × 380) = 285
URP [P to S: entire URP] = 16
URP [S to P: %] (75% × 8) = 6
Total profit attributable to the parent = 730 + 285 − (16 + 6) = 993
 Example 12

5. Profit attributable to NCI:

NCI’s share of Southbourne’s profit (25% × 380) = 95
URP [S to P: %] (25% × 8) = 2
Total profit attributable to NCI = 95 − 2 = 93
The Consolidated Statement of Profit or Loss is as follows:

Extract of Pokesdown Group’s consolidated statement of profit or loss for the year ended 31 March 20X8

Group

$'000

Revenue 8,440

Cost of sales 4,084

Profit for the year 1,086

Profit attributable to owners of Pokesdown Co 993

Profit attributable to non-controlling interest 93

Activity 12

Plaistow Co has owned 70% of the share capital of Steyning Co for several years.
During the year to 31 October 20X7, Plaistow Co made sales to Steyning Co at a value
of $180,000 and with a profit margin of 40%. 50% of these goods remained in Steyning
Co's inventory at 31 October 20X7.
Steyning Co made sales to Plaistow Co at a value of $260,000 and a markup of 30%.
40% of these goods remained in Plaistow Co's inventory at 31 October 20X7.
There was no opening inventory related to intra-group sales.
The following details are taken from the SPLs of both companies for the year ended 31
October 20X7:
 Plaistow Co Steyning Co

$ '000 $ '000

Revenue 3,120 1,840

Cost of sales 1,670 1,310

Profit for the year 530 280

1. What is the revenue figure to be recorded in the consolidated SPL?

2. What is the cost of sales figure to be recorded in the consolidated SPL?
3. What figure would be included for the non-controlling interest's share of profit
for the year?
4. What figure would be included for the owners of Plaistow's share of profit for
the year?
*Please use the notes feature in the toolbar to help formulate your answer.
1. Revenue = Plaistow 3,120 + Steyning 1,840 − Intra-group sales (180 + 260) =
$4,520
2. URP = (180 × 40/100 × 50%) + (260 × 30/130 × 40%) = 60
Cost of sales = Plaistow 1,670 + Steyning 1,310 − Intra-group sales (180 +
260) + PURP 60 = 2,600
3. Profit attributable to NCI = NCI’s share of subsidiary’s profit (30% × 280) − share of
URP from S to P (30% × 24) = 76.8
4. Profit attributable to Plaistow = Plaistow 530 + Plaistow’s share of Steyning’s profit
(70% × 280) − URP [P to S] 36 − URP [S to P] (70% × 24) = 673.2
Activity 13

Poling Co acquired 75% of the share capital of Shipley Co on 1 April 20X2. During the
year to 31 March 20X3, Poling Co sold goods costing $1,200,000 to Shipley Co for
$1,600,000. On 31 March 20X3, 40% of these goods remained in Shipley Co's
inventory.
The summarised statements of profit or loss for Poling Co and Shipley Co for the year
ended 31 March 20X3 were:

Poling Co and Shipley Co’s statements of profit or loss for the year ended 31 March
20X3

Poling Co Shipley Co
 $ '000 $ '000

Revenue 9,200 4,100

Cost of sales (5,750) (2,240)

Gross profit 3,450 1,860

Other operating expenses (1,500) (620)

Profit before tax 1,950 1,240

Income tax expense (490) (320)

Profit for the year 1,460 920

1. Which of the following calculations (expressed in $'000) should be used to

calculate revenue?
1. 9,200 + 4,100
2. 9,200 + (75% × 4,100)
3. 9,200 + 4,100 + 1,200
4. 9,200 + 4,100 − 1,200
5. 9,200 + 4,100 − 1,600
6. 9,200 + (75% × 4,100) − 1,600
2. Which of the following calculations (expressed in $'000) should be used to
calculate the cost of sales?
1. 5,750 + 2,240
2. 5,750 + 2,240 − 1,200
3. 5,750 + 2,240 − 1,600
4. 5,750 + 2,240 − 1,200 + (40% × 400)
5. 5,750 + 2,240 − 1,600 + (40% × 400)
6. 5,750 + 2,240 − 1,600 − (40% × 400)
3. Which of the following calculations (expressed in $'000) should be used to
calculate the profit for the year attributable to the equity shareholders of Poling?
1. 1,460 + 920
2. 1,460 + 920 − 160
3. 1,460 + 920 − 160 − (25% × 920)
4. 1,460 + 920 − 160 − (25% × 920) + (25% × 160)
5. 1,460 + 920 − 160 + (25% × 920) − (25% × 160)
6. 1,460 + 920 − 160 + (25% × 920)
 3.3 Mid-Year Acquisitions

When the parent company acquires a subsidiary partway through the year:
• Only the subsidiary’s revenue and costs of the post-acquisition period will be
included in the consolidated profit or loss.
• The calculation of the NCI's share of the subsidiary's profit will be based on post-
acquisition profits only.
This is because the subsidiary was only a part of the group for that period. Only
intragroup trading after the date of acquisition is excluded on consolidation. For the pre-
acquisition period, the subsidiary was not part of the group; Therefore, no adjustment
should be made for transactions during that period.

Exam advice

Example 13

Pewsey Co acquired all the share capital of Salisbury Co on 1 April 20X4.

The SPLs for the two companies for the year ended 31 December 20X4 are shown below.

Pewsey Co Salisbury Co

$ '000 $ '000

Revenue 4,750 2,940

Cost of sales (2,890) (1,660)

Gross profit 1,860 1,280

Other operating expenses (840) (420)

Profit before tax 1,020 860

Income tax expense (280) (220)

Exam advice

Profit for the year 740 640

Assume Salisbury Co's income and expenses accrue evenly throughout 20X4. The revenues and cost of
sales of the two companies include sales by Pewsey Co to Salisbury Co of $120,000 and sales by
Salisbury Co to Pewsey Co of $200,000. There was no unsold inventory relating to these sales on 31
December 20X4.
From the available SOFP figures above, the following steps are made to prepare the consolidated
CSOFP.
1. Determine the date of acquisition:
The financial period is from 1 January 20X4 to 31 December 20X4, and the date of acquisition
is 1 April 20X4.
The pre-acquisition period is from 1 Jan to 31 March = 3/12 months
The post-acquisition period is from 1 April to 31 Dec = 9/12 months
Only subsidiary figures after the date of acquisition are included in the CSPL. Therefore, the
amount is pro-rated 9/12.
2. Revenue and Cost of Sale:
There are intra-group sales (post-acquisition) of 120 and 200, which must be excluded from the
revenue and cost of sales.
Revenue = Parent 4,750 + Subsidiary (2,940 × 9/12) − Intragroup sales [(120 × 9/12) + (200 ×
9/12)] = 6,715
Cost of Sales = Parent 2,890 + Southbourne (1,660 × 9/12) − Intragroup sales [(120 × 9/12) +
(200 × 9/12)] = 3,895
3. Other figures in the SPL:
There is no mention of dividends paid from the subsidiary to the parent company. Add the other
figures in the SPL together. The subsidiary’s figures must be pro-rated to reflect only 9 out of
the 12 months.
4. Profit Attributable to owners of Pewsey Co:
Pewsey profit = 740
Pewsey’s share of Salisbury’s profit (100% × 640 × 9/12) = 480
Total profit attributable to the parent = 740 + 480 = 1,220
5. Profit attributable to NCI:
Since Pewsey Co owns 100% of Salisbury Co, no NCI exists.
The consolidated statement of profit or loss is as follows:

Pewsey Group’s consolidated statement of profit or loss for the year ended 31 December 20X4

Consolidated
Exam advice

$ '000

Revenue 6,715

Cost of sales (3,895)

Gross profit 2,820

Other operating expenses (1,155)

Profit before tax 1,665

Income tax expense (445)

Profit for the year 1,220

Unless otherwise instructed, always assume that revenue and costs accrue evenly over time.

Activity 14

Pangbourne Co acquired 80% of the share capital of Sunningdale Co on 1 November

20X6. The summarised SPLs for the two companies for the year ended 30 June 20X7
are shown below.

Pangbourne Co and Sunningdale Co statements of profit or loss for the year ended 30
June 20X7

Pangbourne Co Sunningdale Co

$ '000 $ '000

Revenue 12,980 4,770

 Cost of sales (8,120) (2,430)

Gross profit 4,860 2,340

Other operating expenses (2,310) (1,440)

Profit before tax 2,550 900

Income tax expense (600) (210)

Profit for the year 1,950 690

During the year to 30 June 20X7, Pangbourne Co sold goods for $150,000 to
Sunningdale Co, and Sunningdale Co sold goods worth $105,000 to Pangbourne Co.
There was no unsold inventory held by either company relating to these sales on 30
June 20X7.
Use the information provided to prepare the consolidated SPL for the
Pangbourne Group for the year to 30 June 20X7.
*Please use the notes feature in the toolbar to help formulate your answer.
1. Determine the date of acquisition:
The financial period is from 1 July 20X6 to 30 June 20X7, and the date of
acquisition is 1 November 20X6.
The pre-acquisition period is from 1 July X6 to 31 Oct X6 = 4/12 months
The post-acquisition period is from 1 Nov X6 to 30 June X7 = 8/12 months
Only subsidiary figures after the date of acquisition are included in the CSPL.
Therefore, the amount is pro-rated 8/12.
2. Revenue and Cost of Sale:
There are intra-group sales (post-acquisition) of 150 and 105, which must be
excluded from the revenue and cost of sales.
Revenue = Parent 12,980 + Subsidiary (4,770 × 8/12) − Intragroup sales
[(150 × 8/12) + (105 × 8/12)] = 15,990
Cost of Sales = Parent 8,120 + Subsidiary (2,430 × 8/12) − Intragroup sales
[(150 × 8/12) + (105 × 8/12)] = 9,570
3. Other figures in the SPL:
There is no mention of dividends paid from the subsidiary to the parent
company. Add the other figures in the SPL together. The subsidiary’s figures
must be pro-rated to reflect only 8 of the 12 months.
4. Profit Attributable to owners of Pangbourne Co:
Pangbourne profit = 1,950
Pewsey’s share of Sunningdale’s profit [80% × (690 × 8/12)] = 368
Total profit attributable to the parent = 1,950 + 368 = 2,318
5. Profit attributable to NCI:
 NCI’s share of Sunningdale’s profit [20% × (690 × 8/12)] = 92
The Consolidated Statement of Profit or Loss is as follows:
Consolidated SPLOCI for Pangbourne Group for the year ended 30 June 20X7

Consolidated

$ '000

Revenue 15,990

Cost of sales (9,570)

Gross profit 6,420

Other operating expenses (3,270)

Profit before tax 3,150

Income tax expense (740)

Profit for the year 2,410

Profit attributable to:

Equity owners of Pangbourne Co 2,318

Non-controlling interest 92

Profit for the year 2,410

Activity 15 (Full Working CSPL)

The following activity is presented in the style of the computer-based ACCA exam.
Pershore Co acquired 90% of the share capital of Stourport Co on 1 July 20X0. During
the year to 30 June 20X1, Pershore Co sold goods costing $900,000 to Stourport Co for
$1,200,000. 35% of these goods remained in Stourport Co's inventory at 30 June 20X1.
Stourport Co sold goods to Pershore Co for $1,000,000 at a profit margin of 25%. 20%
of these goods remained in Pershore Co's inventory at 30 June 20X1.
The summarised SPLs for the two companies for the year ended 30 June 20X1 are
shown below:

Pershore Co Stourport Co

$ '000 $ '000

Revenue 15,440 8,000

Cost of sales (9,980) (4,460)

Gross profit 5,460 3,540

Distribution costs (1,230) (920)

Administrative expenses (670) (510)

Profit before tax 3,560 2,110

Income tax expense (860) (570)

Profit for the year 2,700 1,540

Using the information provided above, prepare the consolidated SPL for the
Pershore Group for the year to 30 June 20X1.
*Please use the notes feature in the toolbar to help formulate your answer.
1. Determine the date of acquisition:
The subsidiary is acquired at the start of the financial period. Therefore, there
is no pro-rate of the subsidiary’s figures for the CSPL.
2. Revenue and Cost of Sale:
There are intra-group sales of 1,200 (P to S) and 1,000 (S to P).
Unrealised profit (URP) of P to S: [35% × (1,200 − 900)] = 105
Unrealised profit (URP) of S to P: [20% × (1,000 × 25/100)] = 50
Revenue = Parent 15,440 + Subsidiary 8,000 − Intragroup sales (1,200 +
1,000) = 21,240
 Cost of Sales = Parent 9,980 + Subsidiary 4,460 − Intragroup sales (1,200 +
1,000) + UPR (105 + 50) = 12,395
3. Other figures in the SPL:
There is no mention of dividends paid from the subsidiary to the parent
company. Add the other figures in the SPL together.
4. Profit Attributable to owners of the parent:
Pershore profit = 2,700
Pershore’s share of Stourport’s profit (90% × 1,540) = 1,386
URP [P to S: entire URP] = 105
URP [S to P: %] (90% × 50) = 45
Total profit attributable to the Parent = 2,700 + 1,386 − (105 + 45) = 3,936
5. Profit attributable to NCI:
NCI’s share of Stourport’s profit (10% × 1,540) = 154
URP [S to P: %] (10% × 50) = 5
Total profit attributable to NCI = 154 − 5 = 149
The Consolidated Statement of Profit or Loss is as follows:
Consolidated SPLOCI for Pershore Group for the year ended 30 June 20X1

$ '000

Revenue 21,240

Cost of sales (12,395)

Gross profit 8,845

Distribution costs (2,150)

Administrative expenses (1,180)

Profit before tax 5,515

Income tax expense (1,430)

Profit for the year 4,085

Profit attributable to:

 Equity owners of Pershore Co 3,936

Non-controlling interest 149

Profit for the year 4,085

Activity 16 (Full Working CSPL)

The following activity is presented in the style of the paper-based ACCA exam.
Penshurst Co acquired 80% of the share capital of Sandling Co on 30 June 20X8. The
summarised SPLs for the two companies for the year ended 30 September 20X8 are
shown below.

Penshurst Co and Sandling Co statements of profit or loss for the year ended 30
September 20X8

Penshurst Co Sandling Co

$ '000 $ '000

Revenue 22,450 13,500

Cost of sales (14,970) (6,420)

Gross profit 7,480 7,080

Other operating expenses (2,390) (1,820)

Profit before tax 5,090 5,260

Income tax expense (1,400) (1,360)

Profit for the year 3,690 3,900

All Sandling Co's revenue and expenses accrued evenly over the year to 30 September
20X8. This included sales worth $240,000 to Penshurst Co. Penshurst Co made sales
worth $300,000 to Sandling Co between 1 October 20X7 and 30 June 20X8 and
$130,000 between 1 July 20X8 and 30 September 20X8.
There was no inventory relating to these sales held by either company on 30 September
20X8.
The gains on the revaluation of non-current assets were accounted for by Penshurst Co
on 1 January 20X8 and Sandling Co on 1 April 20X8.
Using the information provided above, prepare the consolidated SPL for the
Penshurst Group for the year to 30 September 20X8.
*Please use the notes feature in the toolbar to help formulate your answer.
1. Determine the date of acquisition:
The financial period is from 1 October 20X7 to 30 September 20X8, and the
date of acquisition is 30 June 20X8.
The pre-acquisition period is from 1 Oct X7 to 30 June X8 = 9/12 months
The post-acquisition period is from 1 July X8 to 30 Sept X8 = 3/12 months
Only subsidiary figures after the date of acquisition are included in the CSPL.
Therefore, the amount is pro-rated 3/12.
2. Revenue and Cost of Sale:
There are intra-group sales (post-acquisition − after 30 June X8) of 240 and
130, which must be excluded from the revenue and cost of sales.
Revenue = Parent 22,450+ Subsidiary (13,500 × 3/12) − Intragroup sales
[(240 × 3/12) + 130) = 25,635
Cost of Sales = Parent 14,970 + Subsidiary (6,420 × 3/12) − Intragroup sales
[(240 × 3/12) + 130) = 16,385
3. Other figures in the SPL:
There is no mention of dividends paid from the subsidiary to the parent
company. Add the other figures in the SPL together. The subsidiary’s figures
must be pro-rated to reflect only 3 out of the 12 months.
4. Profit Attributable to owners of Parent:
Parent profit = 3,690
Parent’s share of Subsidiary’s profit [80% × (3,900 × 3/12)] = 780
Total profit attributable to the parent = 3,690 + 780 = 4,470
5. Profit attributable to NCI:
NCI’s share of the Subsidiary’s profit (20% × 3,900 × 3/12) = 195
The Consolidated Statement of Profit or Loss is as follows:
Consolidated SPLOCI for Penshurst Group for the year ended 30 September 20X8

Group

$ '000

Revenue 25,635
 Cost of sales (16,385)

Gross profit 9,250

Other operating expenses (2,845)

Profit before tax 6,405

Income tax expense (1,740)

Profit for the year 4,665

Other comprehensive income -

Gain on revaluation of non-current assets 400

Total comprehensive income for the year 5,065

Profit attributable to:

Equity owners of Penshurst Co 4,470

Non-controlling interest 195

Profit for the year 4,665

4.1 Introduction to Associates

The consolidated financial statements include the financial results of a parent and its
subsidiary. A subsidiary is an entity that can be controlled and owned by the parent.
A parent company may invest in another entity, which leads to the investor having
significant influence over the company but not a controlling interest. As the company
 does not control the entity, it cannot be classified as a subsidiary. Instead, this is a
relationship known as an associate.

4.1.1 Definition and Identification

Definition

An associate is an entity in which a company has invested and where the investor has significant influence over the
investment entity.

Significant Influence:
Significant Influence occurs when the investor of an associate has the power to
participate in the financial and operating policy decisions of the investment. However,
the investor does not have control or joint control of financial and operating policies.
Significant influence is presumed to exist if the investment is 20% or more but less than
50% of the voting rights in the associate. It also can be argued that significant influence
exists for a shareholding of less than 20%. This is usually evidenced by the following:
• Representation on the board of directors of the investee
• Participation in the policy-making process
• Material transactions between the investor and investee
• Interchange of management personnel
• Provision of essential technical information
Key Point

A holding of 20% or more of the voting rights of the investee indicates significant influence, unless it can
be demonstrated otherwise.
A holding of less than 20% presumes that the holder does not have significant influence, unless such
influence can be clearly demonstrated (e.g. representation on the board).

Activity 17

For each of the following statements, state whether there is evidence of

significant influence.
1.Goodwill arises on the acquisition of the investment.
2.There is a non-controlling interest in the investment.
3.The investor holds 10% of equity shares in the investment.
4.The investor has the power to participate in the operating policy decisions of the
investee.
5. The investor assigns one of its directors to the senior management team of the
investee.
*Please use the notes feature in the toolbar to help formulate your answer.
1. No evidence of significant influence. This is a sign of a parent-subsidiary relationship.
2. No evidence of significant influence. This is a sign of a parent-subsidiary relationship.
 3. No evidence of significant influence.
4. Evidence of significant influence
5. Evidence of significant influence

4.2 Equity Accounting

The method used to account for associates is called equity accounting. IAS 28
Investment in Associates requires that the equity method of accounting be used to
incorporate the results of the associate into consolidated financial statements.
Key Point

Under equity accounting, the investor includes its share of the associate's post-tax profits, whether or not
the profits are distributed as dividends.
Equity accounting is only used in consolidated financial statements. If the investor has no subsidiaries and
does not prepare consolidated financial statements, it will not use equity accounting.

4.2.1 Associates in the Financial Statements

• Investor SFP
The investor includes a single line item, ‘Investment in the Associate’, in the
non-current assets section at cost in its SOFP, the same way an investment
in a subsidiary would be accounted for.
• Investor SPL&OCI
Any dividends received from the associate are included in the investor’s
SPLOCI as Other Income.
• Consolidated SFP
The CSFP includes a single line item, ‘Investment in Associate’, in the non-
current assets section at cost plus the investor's share of post-acquisition
profits.
The change each year will be the investor's share of post-tax profit minus
dividends. Dividends are deducted because they are an appropriation of
profits. Bank and cash will increase by dividends received.
• Consolidated SPL
The investor's share of profit for the year is included in the CSPL as a single
item, ‘Share of profit of the associate’ above profit before tax.
Exam advice

The FA exam will not test associate calculations using the equity accounting method. However, the principles of
equity accounting are examinable.
 Example 14

Portslade Co acquired a 30% share of the equity share capital of Aldrington Co on 1 January 20X5 for
$450,000.
Aldrington Co's profits were $150,000 for the year to 31 December 20X5 and $180,000 for the year to 31
December 20X6. Portslade Co did not receive any dividends from Aldrington Co in 20X5 but received a
dividend from Aldrington Co of $20,000 on 31 August 20X6.
Portslade Co also has two subsidiaries and therefore prepares consolidated financial statements.
Portslade’s financial statement is as follows:

Portslade Co's own financial statements

DR CR

$ '000 $ '000

Statement of financial position

Non-current assets

Investment in associate 450

Statement of profit or loss and other comprehensive income

Other income 20

The associate will be reflected in the consolidated financial statement as follows:

Portslade Group's consolidated SFP

DR CR

$ '000 $ '000

Statement of financial position

 Example 14

Investment in associate 529

Workings:

Cost of investment 450

Share of 20X5 profits (30% × $150,000) 45

Investment in associate at 31 December 20X5 495

Share of 20X6 profits (30% × $180,000) 54

Less: Dividend received from associate (20)

Investment in associate at 31 December 20X6 529

Portslade Group's consolidated SPL&OCI

DR CR

$ '000 $ '000

Statement of profit or loss and other comprehensive income

Share of profit of associate 54

Workings:
 Example 14

Effectively the double entries are:

DR Investment in associate (SOFP) 54

CR Share of profit of associate (SPLOCI) with share of associate's profit for the year 54

DR Bank and cash 20

CR Investment in associate (SOFP) with dividend received from associate in year 20

Activity 18

Pevensey Co acquired 40% of the ordinary shares of Alfriston Co on 1 January 20X3 for
a cash payment of $260,000.
Pevensey Co's share of Alfriston Co's profits between 1 January 20X3 and 30 June
20X6 was $170,000.
Alfriston Co made post-tax profits of $120,000 for the year ended 30 June 20X7, and
Pevensey Co received a dividend of $14,000 from Alfriston Co in November 20X6.
Use the information above to prepare Pevensey's financial statements and the
consolidated financial statements for the Pevensey Group for the year ended 30
June 20X7.
*Please use the notes feature in the toolbar to help formulate your answer.

$’000
Pevensey Co's own financial statements

SOFP

Non-current assets

Investment in associate 260

SPLOCI

Other income 14

Pevensey Group’s consolidated financial statements

 SPLOCI 48

Share of profit of associate

SOFP

Investment in associate 464

Workings: $ '000

Cost of investment 260

Share of profits to 30 June 20X6 170

Investment in associate at 30 June 20X6 430

Share of profit of associate for the year to 30 June 20X7 48

Less: Dividend received from associate (14)

Investment in associate at 30 June 20X7 464

Activity 19

Porchfield Co owns 30% of the equity share capital of another company, Alverstone Co.
Porchfield Co prepares consolidated financial statements, and Alverstone Co is
classified as Porchfield Co's associate.
For each statement about the above scenario, determine whether it is True or
False.
1. Dividends received from Alverstone Co are included in Porchfield Co’s statement of
profit or loss and other comprehensive income.
2. Alverstone Co's revenues and costs are added to the consolidated SPL on a line-by-
line basis.
3. The consolidated SOFP includes an amount for 'Investment in Associate', which is
the original cost of investment plus Porchfield Co's share of Alverstone Co's profits.
*Please use the notes feature in the toolbar to help formulate your answer.
1. True. Dividends are included in Porchfield Co's SPLOCI; share of profits are included
in the consolidated financial statements.
2. False. Porchfield Co's share of Alverstone Co's profits is included in a single line in
the consolidated SPL.
3. True. The amount shown in the consolidated SOFP would be adjusted each year by
Porchfield Co's share of profits for that year.
Syllabus Coverage

This chapter covers the following Learning Outcomes.

H. Preparing basic consolidated financial statements

1. Subsidiaries
1. Define and describe the following terms in the context of group accounting:
i. Parent
ii. Subsidiary
iii. Control
iv. Consolidated (group) financial statements
v. Non-controlling interest
vi. Trade (simple) investment
2. Identify subsidiaries within a group structure.
3. Describe the components of and prepare a consolidated statement of financial
position or extracts thereof including:
i. Fair value adjustments at acquisition on property, plant and equipment (excluding
depreciation adjustments)
ii. Fair value of consideration transferred from cash and shares (excluding
deferred and contingent consideration)
iii. Elimination of intra-group trading balances (excluding cash and goods in
transit)
iv. Removal of unrealised profit arising on intra-group trading
v. Acquisition of subsidiaries part way through the financial year
4. Calculate goodwill (excluding impairment of goodwill) where non-controlling interest
is valued at its fair value at the acquisition date as follows:
Fair value of consideration
Fair value of non-controlling interest
Less fair value of net assets at acquisition
= Goodwill at acquisition
1. Describe the components of and prepare a consolidated statement of profit or loss or
extracts thereof including:
i. Elimination of intra-group trading balances (excluding cash and goods in transit)
ii. Removal of unrealised profit arising on intra-group trading
iii. Acquisition of subsidiaries part way through the financial year
2. Associates
1. Define and identify an associate and significant influence and identify the situations
where significant influence exists.
2. Describe the key features of a parent-associate relationship and be able to identify
an associate within a group structure.
3. Describe the principle of the equity method of accounting for associate entities.

Summary
• Ownership of at least 50% of voting rights is presumed to give rise to the
control (i.e. the power to govern financial and operating policies) of a
subsidiary.
• Consolidated financial statements are those of a group presented as a single
economic entity.
• A parent must prepare consolidated financial statements in addition to
its separate financial statements (IFRS 10).
• Consolidated financial statements are prepared under the acquisition method
(IFRS 3).
• The only exception to the rule to consolidate a subsidiary is when control is
temporary.
• In the consolidated statement of financial position:
o There is no cost of investment in the subsidiary.
o 100% of the subsidiary's assets and liabilities are added to
those of the parent on a line-item basis (regardless of the parent's
shareholding).
o Goodwill on acquisition is calculated on fair values.
o Non-controlling interest should be calculated using the full
goodwill (i.e. fair value) method.
o Consolidated retained earnings are the sum of the parent's
retained earnings and the parent's share of the subsidiary's post-
acquisition retained earnings.
• In the consolidated statement of profit or loss:
o 100% of the subsidiary's revenues and costs are added to
those of the parent on a line-item basis (regardless of the parent's
shareholding).
o Profit or loss for the year is analysed between owners of the
parent and NCI.
• Fair value is the amount for which an asset could be sold (or a liability
transferred) between market participants.
• Adjustments must be made in the net asset working for differences between
the fair values and carrying amounts of the subsidiary's assets.
• The adjustments are not revaluations; they are reflected in the amount of
goodwill calculated.
• Purchase consideration in the form of shares is measured at the market value
of the shares issued.
• Intra-group transactions, balances and any profit that is not realised to the
group must be eliminated on consolidation.
• When group companies trade with each other, unrealised profits arise when
the buying company still holds any of these goods at the reporting date.
• When a subsidiary is acquired part way through a year, only post-acquisition
revenues and costs are included in the consolidated statement of profit or
loss (and consolidated retained earnings).
• Ownership of 20% or more (but not more than 50%) is presumed to be
significant influence.
• An associate is an entity over which the investor has significant influence and
which is neither a subsidiary nor an interest in a joint venture.
• Associates are accounted for using the equity method under which:
 o Investment in associate is a single line item in the
consolidated statement of financial position.
o Share of profit of associate is a single line item in the
consolidated statement of profit or loss.

Technical Articles

ACCA provide technical articles and other resources to guide and help students.
This chapter includes the relevant content of the following related technical articles
available at the time of writing (October 2022):
Preparing a consolidated statement of financial position
Preparing simple consolidated financial statements
Please visit the ACCA global website for more recent articles and other resources.