CONSOLIDATION

Part B –covered till 18 th

Apr
 Consolidation -
Example 7
• 100% ownership
• Add Parent (P) and Subsidiary (S) Balance sheet
• Eliminate INVESTMENT ACCOUNT IN P
• Calculate Goodwill
• Record impairment of Goodwill
Goodwill & Impairment: P acquires 100% of the equity shares of S on January 1. P paid $150,000 for
the shares. At acquisition fair value of the net assets of S was $95,000.At December 31 goodwill has
been impaired by $5,000.
P S P S CSFP 31/12
1/1 1/1 31/12 31/12
Non-current Assets:
Non-current Assets: Goodwill* 50,000
Property, plant & 500,000 75,000 525,000 80,000 Property, plant & equipment 605,000
equipment
Current Assets 295,000
Investment in S 150,000 - 150,000 - 950,000
650,000 75,000 675,000 80,000
Current Assets 100,000 75,000 175,000 120,000 Equity
Equity shares of $1 each 200,000
750,000 150,000 850,000 200,000
Share Premium 150,000
Equity Retained Earnings** 375,000
Equity shares of $1 200,000 25,000 200,000 25,000
each 725,000

Share Premium 150,000 5,000 150,000 5,000 Current Liabilities 225,000

950,000
Retained Earnings 250,000 65,000 325,000 120,000
600,000 95,000 675,000 150,000 * Goodwill = 150-95=55
Current Liabilities 150,000 55,000 175,000 50,000 After Impairment Goodwill = 55-5 = 50
Retained earnings = 325+120-65-5**=375
750,000 150,000 850,000 200,000 ** Impairment of goodwill recorded as loss as part of other income
and expenses in Income statement
 Consolidation
Example 8 – Required Calculate Goodwill if acquisition is mid year
• 100% ownership
• P acquires S mid year
Goodwill & Mid-year Acquisition: P acquires 100% of S on 1 August, 2014 at a cost of $500,000.
The statement of financial position of S is shown below. Calculate goodwill. Assume assets are at FV.

S S
1/1/14 31/12/14
$
Non-current Assets:
Net Assets at 1/1/14 370,000
Property, plant & equipment 325,000 345,000
Other Assets 75,000 100,000 Profits for 7 months to 1 21,000
August (7/12 x [156 - 120])
400,000 445,000
Net Assets of S at 1 August 391,000
Equity
Equity shares of $1 each 200,000 200,000 Cost of shares 500,000
Share Premium 50,000 50,000 Goodwill 109,000
Retained Earnings 120,000 156,000
370,000 406,000
Current Liabilities 30,000 39,000
400,000 445,000 Key Assumption
Profits accrue evenly over the year
 Consolidation
Consolidation
• Consolidation is required even if less that 100% of shares are owned. (Control and Power)
• Total assets and liabilities of subsidiary companies are included in the consolidated
statement of financial position, even in the case of subsidiaries which are only partly
owned.
• A proportion of the net assets of such subsidiaries in fact belongs to investors from outside
the group (non-controlling interests).
• IFRS 3 allows two alternative ways of calculating non-controlling interest in the group
statement of financial position.
Non-controlling interest can be valued at:
(a) Its proportionate share of the fair value of the subsidiary's net assets; or
(b) Full (or fair) value (usually based on the market value of the shares held by the
non-controlling interest)
 Consolidation – NCI using
Proportionate share
1) Aggregate the assets and liabilities in the statement of financial
position i.e 100% P Co + 100% S Co irrespective of how much P Co
actually owns. Equity will show Non controlling interest
This shows the amount of net assets controlled by the group.
2) Share capital is that of the parent only.
3) Balance of subsidiary's post-acquisition reserves are consolidated
(after cancelling any intra-group items). P’s share only
4) Calculate the non-controlling interest share of the subsidiary's net
assets (share capital plus reserves).
5) NCI is shown as part of equity on Consolidated statements
NCI = (NCI % x share Capital) + (NCI % x retained earnings)
9)P Co has owned 75% of the share capital of S Co since the date of S Co's incorporation. Their latest statements of
financial position are given below. Use proportionate share method
P S
31/12 31/12
Non-current Assets:
PP&E 50,000 35,000 85,000
Investment in S ($1 ordinary shares) 30,000 -
80,000
Current Assets 45,000 35,000 80,000
Total Assets 125,000 70,000 165,000

Equity:
Equity shares of $1 each 80,000 40,000 80,000
Retained Earnings 25,000 10,000 32,500*
105,000 50,000 112,500
NCI 12,500
Current Liabilities 20,000 20,000 40,000
125,000 70,000 165,000
Note: All of S Co's net assets are consolidated despite the fact that the company is only 75% owned *Retained earnings
Non-controlling share of share capital (25% x $40,000) = 10,000 25,000 + (75%x10,000)= 32,500
Non-controlling share of retained earnings (25% x $10,000) = 2,500
Total = 12,500
Consolidation – NCI at Proportionate share
and Goodwill

If P Co had obtained less than 100% of the shares of S Co.

• P Co had paid $70,000 for 40,000 shares in S Co,
• Net asset of S Co at acquisition $ 60,000
Goodwill working would be as follows:
Consideration transferred 70,000
Non-controlling interest (60,000 x 20%) 12,000
Net assets acquired (60,000)
Goodwill 22,000

Note: Goodwill is the excess of the amount transferred plus the amount of non-controlling interests
over the fair value of the net assets of the subsidiary. (Net assets netted of non-controlling interest)
10)NCI: P acquires 300,000 shares of S on January 1, 2014. P paid $850,000 to buy the shares.
1.Calculate % shareholding.
2. Calculate subsidiaries' Net Assets at date of acquisition & date of reporting.
3. Calculate Goodwill.
4. Calculate NCI.
5. Calculated Group Retained Earnings. Now prepare CSFP at 1/1 using proportionate share for NCI
P 1/1 S 1/1 1. 300,000 shares / 400,000 (total shares) = 75% 1/1
2. Net Assets = 800,00
Property, plant & 1,400,000 850,000 Non-current Assets:
equipment 3. Goodwill (850 - [75% of 800]) 250,000
Investment in S 850,000 - Property, plant & equipment (1400 + 850) 2,250,000
2,250,000 850,000 Current Assets (500 + 200) 700,000
Other Assets 500,000 200,000 3,200,000
2,750,000 1,050,000 Equity
Equity shares of $1 each 800,000
Share Premium 600,000
Equity shares of $1 each 800,000 400,000
5. Retained Earnings 950,000

Share Premium 600,000 200,000 2,350,000

Retained Earnings 950,000 200,000 4. Non-Controlling interest (1 – 75%) of 800 200,000
2,350,000 800,000 2,550,000
Current Liabilities 400,000 250,000 Current Liabilities (400 + 250) 650,000
2,750,000 1,050,000 3,200,000
 Consolidation – NCI at Fair Value
• IFRS 3 gives entities the option of valuing non-controlling interest (NCI) at fair value.
• IFRS 3 suggests that the closest approximation to fair value will be the market price of
the shares held by non-controlling shareholders just before acquisition by the parent

• Assume that the market price of the shares was $1.25. 80% of 50,000 shares acquired
by P. 10,000 with NCI. P Co had paid $70,000 for 40,000 shares in S Co, Net asset of S
Co at acquisition $ 60,000
The goodwill calculation will then be as follows:
Consideration transferred 70,000
Fair value of NCI (10,000 × $1.25) 12,500
Net assets at acquisition (60,000)
Goodwill 22,500
Note: $500 higher than goodwill calculated measuring NCI at its share of the net assets of the
subsidiary. This $500 represents the goodwill attributable to the NCI
NCI at year end has to be calculated too
11) P Co acquired 75% of the shares in S Co on 1/1 when S Co had retained earnings of $15,000. The market price of S Co's shares just before the
date of acquisition was $1.60. P Co values NCI at fair value. Goodwill is not impaired.
P 31/12 S 31/12 CSFP 12/31

Property, plant & 60,000 50,000 Non-current Assets:

equipment Goodwill * 23,000
Investment in S 68,000 - Property, plant & equipment 110,000

128,000 50,000 Current Assets 87,000

220,000
Current Assets 52,000 35,000
Equity
180,000 85,000
Equity shares of $1 each 100,000
**Retained Earnings 77,500
Equity shares of $1 each 100,000 50,000
Retained Earnings 70,000 25,000 177,500
***NCI 22,500
170,000 75,000
Current Liabilities 10,000 10,000 200,000
Current Liabilities 20,000
180,000 85,000
220,000
*Goodwill
Consideration transferred 68,000
Fair Value of NCI (12,500 × $1.60) 20,000
Net assets of S Co at acq (50,000 +15,000) (65,000) **R.E = 70,000 +75%x(25,000-15,000) = 77,500
Goodwill 23,000 *** NCI = 20,000 (at acq)+ 25% x 10,000 (R.E) = 22,500
Consolidation – Dividend paid by S
When a subsidiary pays a dividend during the year.

Example
• S Co., a 60% subsidiary of P Co., pays a dividend of $1,000 on the last day of its
accounting period.
• Its total reserves before paying the dividend stood at $5,000.
(a) $400 of the dividend is paid to non-controlling shareholders. The cash leaves the group
and will not appear anywhere in the consolidated statement of financial position.
(b) The parent company receives $600 of the dividend,
Dr cash
Cr Dividend/profit or loss.
This will be cancelled on consolidation.
(c) The remaining balance of retained earnings in Subsidiary Co's statement of financial
position ($4,000) will be consolidated in the normal way.

The group's share (60% x $4,000 = $2,400) will be included in group retained earnings in
the statement of financial position;
the non-controlling interest share (40% x $4,000 = $1,600) is credited to the non-
controlling interest account in the statement of financial position
 Consolidation – Forms of
Consideration
Forms of consideration
• Cash
• Contingent consideration : of the acquirer to transfer additional assets or equity
interests to the former owners of an acquiree as part of the exchange for control
of the acquiree if specified future events occur or conditions are met’
IFRS 3 requires recognition of all contingent consideration, measured at fair value,
at the acquisition date
• Deferred Consideration: An agreement may be made that part of the
consideration for the combination will be paid at a future date. This consideration
will therefore be discounted to its present value using the acquiring entity's cost
of capital
• Share exchange: Parent issues own shares in exchange for Sub’s shares
 Consolidation – Forms of
Consideration
Deferred Consideration Example
• P acquired 75% of the subsidiary's 80m $1 shares on 1/1/16.
• It paid $3.50 per share and agreed to pay a further $108m on 1/1/17.
• The parent company's cost of capital is 8%.
In SFP as 31 December 2016 the cost of the combination will be:
80m shares x75% x $3.50 210m
Deferred consideration:
$108m x 1/1.08 100m
Total consideration 310m

At 31 December 2016 $8m will be charged to finance costs, being the unwinding of the discount on the
deferred consideration.
The deferred consideration was discounted by $8m to allow for the time value of money.
At 1 January 2017 the full amount becomes payable.
 Consolidation – Forms of
Consideration
Share exchange example
The parent has acquired 12,000 $1 shares in the subsidiary by issuing 5 of its own $1
shares for every 4 shares in the subsidiary. The market value of the parent
company's shares is $6.
Cost of the combination:
$ 12,000 x5/4 x$6 90,000
Note Cr share capital and share premium of the parent company as follows.
Debit Credit
Investment in subsidiary 90,000
Share capital ($12,000 x5/4) 15,000
Share premium ($12,000 x5/4 x5) 75,000