108 1 1 : G r o u p a c c o u n t s: B a si c pr i nc i p l e s Financial Accounting and Reporting

1 Context for group accounts

1.1 What is a group?
In simple terms a group is created where one company, the parent (P) buys shares in another
company, the subsidiary (S), such that the parent company controls the subsidiary. A group may
include one or many subsidiaries.
Shareholders

P plc

S1 Ltd S2 Ltd S3 Ltd

The shareholders (owners) of P plc may be individuals and/or institutions such as pension funds.
A subsidiary is an entity that is controlled by another entity (known as the parent).
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits
from its activities.

1.2 The single entity concept

Group accounts consolidate the results and net assets of group members to present the group to the
parent's shareholders as a single economic entity. This reflects the economic substance of the
relationship between companies where one controls another.

1.3 Subsidiaries, Associates and Investments

Investment Criterion Treatment in group accounts
Subsidiary Control (usually >50%) Consolidation
Associate Significant influence (20%+) Equity method
Investment Asset held for accretion of wealth Usually at cost

2 Control and ownership

In an individual company's accounts, there is only one ownership interest, ie that of the shareholders
in that individual company, represented by the capital and reserves (which equals net assets).
In a group, it is possible for the parent to have control of a subsidiary without owning 100% of it.

2.1 Control
Control means the ability to govern the financial and operating policies of an entity with a view to
gaining economic benefit from its activities.
IFRS 10 Consolidated financial statements states that an investor controls an investee if it has:
(i) Power over the investee (whether or not it is exercised), and
(ii) Exposure, or rights, to variable returns from the investee, and
(iii) The ability to use its power over the investee to affect the amount of the returns.

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The acquirer (parent) gains control over an acquiree (subsidiary) usually by acquiring more than half
of the voting rights.
Control also exists where P:
 Has power over a majority of the voting rights, through an agreement with others
 Can govern the financial and operating policies of S under statute or agreement
 Can appoint or remove the majority of the members of the board of directors (or equivalent top
management) of S, or
 Can cast the majority of votes at S's board meetings.

EXAM SMART
In the exam, you should assume that an entity controls another entity if it holds more than
50% of the voting rights in the other entity unless the question suggests otherwise.

2.2 Ownership
That part of S's net assets and results included in the consolidation which is not owned by P is owned
by the non-controlling interest (NCI)
When preparing the consolidated accounts, P's control of S and the ownership interest of P and NCI in
S need to be reflected. Group accounts reflect both control and ownership.

Consolidated statement of financial position (CSFP)

£
Shows resources under group's
Assets CONTROL X
control as a single entity
(P + S (100%) – intra-group items)
X

Equity OWNERSHIP
Share capital (P only) X Ownership spilt between:
Reserves  Parent company share
(P + (P% × S post-acquisition)) X  Non-controlling interest share
Attributable to owners of P X
Non-controlling interest X

Total equity X

Liabilities CONTROL X
X

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Consolidated statement of profit or loss (CSoPL)

£
Shows revenue and expenses under
Revenue X
group's control as a single entity
(P + S (100%) – intra-group items)

Profit after tax (PAT) (Control) X PAT spilt between:

Attributable to:  Parent company share
Owners of P (ß) X  Non-controlling interest share
Non-controlling interest (NCI% × S's PAT) X
X

The CSFP includes P's reserves plus P's share of S's post acquisition reserves, as these reserves are
generated under P's control.
S's reserves at acquisition (pre-acquisition reserves), along with its share capital, are cancelled against
P's cost of investment in S.
The same basic calculation is used for each reserve separately (eg revaluation surplus, retained
earnings).

INTERACTIVE QUESTION 1: CONTROL AND OWNERSHIP

The statements of financial position of two companies at 31 December 20X7 are as follows:
Austin Ltd Reed Ltd
£ £
Non-current assets
Property, plant and equipment 80,000 8,000
Investments: Shares in Reed Ltd 12,000 –
92,000 8,000
Current assets 58,000 13,000
Total assets 150,000 21,000
Equity
Called up share capital 100,000 10,000
Retained earnings 30,000 5,000
Total equity 130,000 15,000
Liabilities 20,000 6,000
Total equity and liabilities 150,000 21,000

Austin Ltd acquired 80% of Reed Ltd on 31 December 20X7.

Requirement
Prepare the consolidated statement of financial position of Austin Ltd as at 31 December 20X7.
Fill in the proforma below.
SOLUTION

DRAFT
Financial Accounting and Reporting 1 1 : G r o u p a c c o u n t s: B a si c pr i nc i p l e s 111

Austin Ltd: Consolidated statement of financial position as at 31 December 20X7

£
Non-current assets

Property, plant and equipment

Current assets

Total assets

Equity attributable to owners of the parent

Called up share capital (Austin Ltd only)

Retained earnings

Non-controlling interest

Total equity

Liabilities

Total equity and liabilities

3 IFRS 3 (revised) Business Combinations

3.1 Goodwill
Goodwill is an intangible asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately recognised.
After initial recognition, goodwill should be shown in the consolidated statement of financial position.
Goodwill is not amortised but is tested for impairment at least annually in accordance with IAS36
Impairment of Assets.
If goodwill has suffered an impairment the loss will be recognised in the consolidated profit or loss.
Retained earnings in the consolidated statement of financial position will also be reduced.
Goodwill arising from a business combination is calculated as follows:
£
Fair value of consideration transferred X
Non-controlling interest at acquisition X
Less: Fair value of net assets acquired* (X)
Goodwill/(Gain from a bargain purchase) X/(X)

* this is often calculated as the subsidiary’s share capital and any reserves at acquisition.

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INTERACTIVE QUESTION 2: GOODWILL

P plc pays £10,000 to buy 75% of the share capital of S Ltd. The statement of financial position of S Ltd
at the date of acquisition shows the following.
£
Assets 16,000

Share capital 1,000

Retained earnings 11,000
Equity 12,000
Liabilities 4,000
16,000

Requirement
Calculate the goodwill arising on P plc's acquisition of S Ltd, assuming the non-controlling interest at
the date of acquisition is to valued using the proportionate basis (see worked example 1)
SOLUTION
£

Consideration transferred

Plus: Non-controlling interest at acquisition

Less: Fair value of net assets at acquisition

Goodwill

3.2 Bargain purchase

In certain circumstances the parent entity may pay less to acquire a subsidiary than represented by its
share of the subsidiary's net assets. This 'gain on a bargain purchase' (negative goodwill) is recognised
in profit or loss in the period in which the acquisition is made, and retained earnings will therefore
increase.

3.3 Measurement of non-controlling interest

IFRS3 allows two methods of measuring the non-controlling interest at acquisition:
 At the NCI’s share of the acquiree’s net assets (proportionate basis)
 At fair value (which will then be given in the question). This method results in the non-
controlling interest recognising a proportion of goodwill at acquisition.
Each business combination is treated separately, so the choice in respect of one acquisition is not
binding for subsequent combinations.

DRAFT
Financial Accounting and Reporting 1 1 : G r o u p a c c o u n t s: B a si c pr i nc i p l e s 113

WORKED EXAMPLE 1: MEASURING NON-CONTROLLING INTEREST AT ACQUISITION

The consideration transferred by National plc when it acquired 800,000 of the 1,000,000 £1 equity
shares of Locale Ltd was £25 million At the acquisition date Locale Ltd’s retained earnings were
£20 million and the fair value of the 200,000 equity shares in Locale Ltd not purchased was £5million.
Calculate goodwill on the basis that the NCI at acquisition is measured using
(a) The proportionate basis
(b) Fair value
SOLUTION
Proportionate Fair value
basis basis
£m £m
Consideration transferred 25 25
NCI 20% × £21m 4.2 per q 5

Net assets acquired (£1m + £20m) (21) (21)

Goodwill at acquisition 8.2 9

Note: where the non-controlling interest at acquisition has been measured at fair value and there is an
impairment to goodwill, the NCIs share of that impairment will need to be charged to the NCI working.
In this case any goodwill impairment in the question would be allocated as follows.
Dr Retained earnings (parent share of goodwill impairment) X
Dr Non-controlling interest (NCI share of goodwill impairment) X
Cr Goodwill X

4 Knowledge diagnostic
Before you move on to question practice, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Why does a group present consolidated financial statements?

What is the difference between a subsidiary and an associate?

Can you define control? Can you explain the three elements of control?

What is the correct figure for share capital in the consolidated statement of
financial position?

Do the consolidated assets and consolidated liabilities in the consolidated

statement of financial position represent control or ownership?

Can you explain how to calculate goodwill?

Can you explain the effect of measuring NCI at fair value and on a proportionate
basis?

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DRAFT
115

12

Group accounts: consolidated

statement of financial position

Learning outcomes
 Prepare a consolidated statement of financial position using proformas including the results of the
parent entity and one or more subsidiaries from individual financial statements including adjustments
for the following:
– Acquisition or disposal of a subsidiary
– Goodwill
– Intra-group items
– Unrealised profits
– Fair values
– Other consolidation adjustments
 Prepare extracts from the consolidated statement of financial position, including adjustments for the
transactions listed above.
 Explain the illustrate the difference between the relevant treatment under IFRS Standards and UK
GAAP

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116 12: Group accounts: consolidated statement of financial position Financial Accounting and Reporting

1 Goodwill
Goodwill arising from a business combination is calculated as follows:
£
Fair value of consideration transferred X
Non-controlling interest at acquisition X
Less: Fair value of net assets acquired (X)
Goodwill/(Gain from a bargain purchase) X/(X)

1.1 Measuring the consideration transferred

The cost of the business combination (the investment in the parent company’s single entity accounts)
is the total of the fair values of the consideration transferred to gain control. In simple terms, it is
what the parent company paid to purchase its shareholding in the subsidiary and can include cash,
other assets and liabilities assumed by the acquirer.

EXAM SMART
The most common forms of consideration examined in FAR are detailed in the table below.
It is important that you are confident with all of them.

Consideration Calculation of fair value at the Subsequent treatment

date of acquisition
Cash fair value is assumed to equal the n/a
cash paid at the acquisition date
Equity instruments (shares in the fair value of any quoted equity n/a
parent company) shares would usually be the
published price at the date of
exchange.
Deferred consideration (a definite fair value is the discounted The deferred consideration
cash payment deferred until a later present value at the date of liability will increase to reflect the
date) acquisition. unwinding of the discount,
creating a finance cost to the
parent company.
Contingent consideration (a fair value at the date of The contingent consideration
potential cash payment deferred acquisition will be given in the liability will be adjusted to reflect
until a later date and dependent question, this fair value will factor post acquisition changes to its
upon certain targets or outcomes in both the probability of fair value. The change will be
being achieved) payment and the time value of adjusted through the parent
money. company’s statement of profit or
loss.

Acquisition-related costs such as professional and other fees relating specifically to the individual
transaction eg accountants’ fees and legal costs are required to be recognised as expenses in the
period in which they are incurred, except for the costs of arranging financial liabilities (eg loans) and
issuing equity are deducted from the liability/equity.

DRAFT
Financial Accounting and Reporting 12: Group accounts: consolidated statement of financial position 117

INTERACTIVE QUESTION 1: MEASURING FAIR VALUE OF CONSIDERATION

Kelly plc acquired 100% of Eclipse plc on 1 July 20X7. The consideration comprised:
 An immediate cash payment of £1,000,000
 5 million 25p ordinary shares of Kelly plc with a market value at 1 July 20X7 of 60p
 A further payment of £968,000 to be made on 1 July 20X9. The appropriate cost of capital for
Kelly plc is 10% per annum.
 A further payment of £1,000,000 to be made on 1 July 20X8 if post-acquisition profit targets are
met. Given the probability that the profits will meet this target, the fair value of this contingent
consideration was deemed to be £400,000 as at 1 July 20X7.
 Acquisition-related costs totalled £50,000 including payments for legal advisors and
management consultants.
Requirement
Show the entries in Kelly plc's accounting records to record its investment in Eclipse plc.
Fill in the proforma below.
SOLUTION
£

Consideration transferred

Cash

Shares issued

Deferred consideration

Contingent consideration

£ £

Recording investment in Eclipse plc

DR Investment

CR Cash

CR Share capital

CR Share premium

CR Deferred consideration liability

CR Contingent consideration liability

Recording acquisition-related costs

DR

CR Cash

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118 12: Group accounts: consolidated statement of financial position Financial Accounting and Reporting

1.2 Recognising and measuring the net assets acquired

The subsidiary’s identifiable assets and liabilities should be recognised at fair value at the date of
acquisition.
Sometimes assets and liabilities that the subsidiary has not recognised in its single entity accounts are
recognised on consolidation, such as some internally-generated intangibles and contingent liabilities.
This usually requires adjustments at the acquisition date (known as fair value adjustments)
Assets other than intangible Where it is probable that any associated future economic benefits will
assets, for example land and flow to the acquirer, and their fair value can be measured reliably.
buildings.
Intangible assets Where they meet the definition of an intangible asset in accordance
with IAS 38 Intangible assets and their fair value can be measured
reliably.
Examples of separable assets include:
 Customer lists
 Databases
Examples of assets arising from contractual or other legal rights include:
 Trademarks
 Internet domain names
 Copyrights and patent rights
 Licences
Liabilities other than contingent Where it is probable that an outflow of resources embodying economic
liabilities benefits will be required to settle the obligation, and its fair value can
be measured reliably.
An acquirer may only recognise a subsidiary’s liabilities if they exist at
the acquisition date. This prohibits any account being taken at that time
of:
 Reorganisation plans devised by the parent which will only be put
into effect once control over the subsidiary is gained.
 Future losses to be incurred as a result of the business
combination (this covers future losses to be incurred by the parent
as well as by the subsidiary).
Contingent liabilities Where there is a present obligation as a result of a past event and their
fair value can be measured reliably.

WORKED EXAMPLE 1: MEASURING FAIR VALUE OF NET ASSETS ACQUIRED

On 1 January 2020 Milo plc acquired 100% of the 1 million 50p equity shares in Mabel Limited. At the
date of acquisition Mabel Ltd reported retained earnings of £380,000 and had no other reserves.
At acquisition Mabel Ltd held land and buildings at a carrying amount of £450,000. An independent
valuation stated the market value of the property to be £600,000 at 1.1.2020.
Mabel Ltd also owned a customer database which the directors of Milo plc considered to have a fair
value of £100,000 at the acquisition date. Mabel Ltd had created the database over many years and as
such was not recognising it as an intangible asset in its single entity accounts.
Mabel Ltd had disclosed a contingent liability relating to a claim from ex-employee for unfair dismissal.
The claim amounted to £400,000 although Mabel Ltd had concluded that it was unlikely that they
would lose the case. At acquisition, the directors of Milo plc felt that the fair value of the claim would
be £70,000.

DRAFT
Financial Accounting and Reporting 12: Group accounts: consolidated statement of financial position 119

Following acquisition of Mabel Ltd, the directors of Milo reorganised the business, incurring
redundancy costs of £60,000 and implemented a new computer system across both entities at a cost
of £250,000.
Requirement
Calculate the fair value of the net assets acquired
SOLUTION
£'000
Carrying amount of net assets acquired (= equity at acquisition)
Share Capital (1m × 50p) 500,000
Retained earnings at acquisition 380,000
CV at 1.1.2020 880,000
Fair value adjustments at acquisition
Land and buildings (£600,000 – £450,000) 150,000
Intangible asset 100,000
Contingent liability (70,000)
Fair value of net assets at acquisition 1,060,000

The redundancy costs and new computer system are not relevant to the net assets at acquisition and
should be expensed in the post-acquisition period.

2 Question technique
Standard workings:
(1) Establish group structure (% shareholdings and dates of acquisitions)
(2) Set out net assets of S Ltd
At year end At acquisition Post acquisition
£ £ £
Share capital X X X
Retained earnings X X X
X X

(3) Calculate goodwill

£
Consideration transferred X
Plus: Non-controlling interest at acquisition X
Less: fair value of net assets at acquisition (see W2) (X)
X
Total impairment to date (X)
Balance c/f X

(4) Calculate non-controlling interest (NCI) at year end

£
Non-controlling interest at acquisition (W3) X
Share of post acquisition gains/losses (W2) X
Less non-controlling interest share of any goodwill impairment if calculated using
the fair value method. (X)
Non-controlling interest at the year-end X

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120 12: Group accounts: consolidated statement of financial position Financial Accounting and Reporting

(5) Calculate consolidated retained earnings

£
P Ltd (100%) X
+ S Ltd (share of post-acquisition retained earnings (see W2)) X
Less goodwill impairments to date (see W3)* (X)
X

* if using the proportionate basis for NCI at acquisition this will be all the goodwill impairment, if using
the fair value method this will only be the parent’s share of goodwill impairment.

EXAM SMART
Remember that a gain on a bargain purchase is rare. If your goodwill calculation shows
‘negative goodwill’ check that:
 You have included all the consideration (cash; shares; deferred; contingent).
 You have included the non-controlling interest.
 You have included the fair value of all assets acquired and liabilities assumed.

INTERACTIVE QUESTION 2: CONSOLIDATED STATEMENT OF FINANCIAL POSITION WORKINGS

The following are the summarised statements of financial position of a group of companies as at
31 December 20X1.
Rik Ltd Viv Ltd Neil Ltd
£ £ £
Non-current assets
Property, plant and equipment 100,000 40,000 10,000
Investments
Shares in Viv Ltd (75%) 25,000
Shares in Neil Ltd (60%) 10,000
Current assets 45,000 40,000 25,000
180,000 80,000 35,000
Equity
Share capital 50,000 20,000 10,000
(£1 ordinary)
Retained earnings 100,000 40,000 15,000
Total equity 150,000 60,000 25,000
Liabilities 30,000 20,000 10,000
180,000 80,000 35,000

Rik Ltd acquired its shares in Viv Ltd and Neil Ltd during the year, when their retained earnings were
£4,000 and £1,000 respectively.
At the end of 20X1 the goodwill impairment review revealed a loss of £3,000 in relation to the
acquisition of Viv Ltd. Rik prefers to measure the non-controlling interest at acquisition using the
proportionate method.
Requirement
Prepare the consolidated statement of financial position of Rik Ltd at 31 December 20X1.

DRAFT
Financial Accounting and Reporting 12: Group accounts: consolidated statement of financial position 121

SOLUTION
Rik Ltd: Consolidated statement of financial position as at 31 December 20X1
£

Non-current assets

Property, plant and equipment

Intangibles (W3)

Current assets

Total assets

Equity attributable to owners of the parent

Share capital

Retained earnings (W5)

Non-controlling interest (W4)

Total equity

Liabilities

Total equity & liabilities

WORKINGS
(1) Group structure
Rik Ltd

75% 60%

Viv Ltd Neil Ltd

(2) Net assets

Post-
Year end Acquisition acquisition
£ £ £

Viv Ltd

Share capital

Retained earnings

DRAFT
122 12: Group accounts: consolidated statement of financial position Financial Accounting and Reporting

Post-
Year end Acquisition acquisition
£ £ £

Neil Ltd

Share capital

Retained earnings

(3) Goodwill
Viv Ltd Neil Ltd Total
£ £ £

Consideration transferred

Plus: Non-controlling interest at acquisition

Less: Net assets

Viv Ltd

Neil Ltd

Goodwill

Impairment to date

Balance c/f

(4) Non-controlling interest at year end

Viv Ltd Neil Ltd
£ £

Non-controlling interest at acquisition

Share of post acquisition

(5) Retained earnings

£

Rik Ltd

Viv Ltd – Share of post-acquisition retained earnings

Neil Ltd – Share of post-acquisition retained earnings

Goodwill impairment to date (W3)

DRAFT
Financial Accounting and Reporting 12: Group accounts: consolidated statement of financial position 123

3 Mid-year acquisitions
If the subsidiary is acquired mid-year, it is necessary to calculate reserves, including retained earnings,
at the date of acquisition.
It is usually assumed that a subsidiary's profits accrue evenly over time. However, unless otherwise
stated, it should be assumed that any dividends paid by the subsidiary are out of post acquisition
profits.

INTERACTIVE QUESTION 3: MID-YEAR ACQUISITION

P plc acquired 80% of S Ltd on 31 May 20X2 for £20,000. S Ltd's retained earnings had stood at
£15,000 on 1 January 20X2.
S Ltd's equity at 31 December 20X2 was as follows.
£
Share capital 1,000
Retained earnings 15,600
Equity 16,600

Requirements
(a) Produce the standard working for S Ltd's net assets (W2).
(b) Produce the standard working for goodwill on consolidation (assume the proportionate
method) (W3).
(c) Calculate S Ltd's retained earnings which will be included in the consolidated retained earnings.
SOLUTION
(a) Net assets (W2)
End of reporting Post
period Acquisition acquisition
£ £ £

Share capital

Retained earnings

(b) Goodwill (W3)

£

Consideration transferred

Plus: Non-controlling interest at acquisition

Less: Net assets

(c) Profit from S Ltd included in consolidated retained earnings

£

Share of post-acquisition retained earnings of S Ltd

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124 12: Group accounts: consolidated statement of financial position Financial Accounting and Reporting

4 Intra group balances

The objective of group accounts is to present the group as a single entity.
The effects of transactions between group members need to be eliminated, as the group has not
transacted with any third party. These transactions could be between the parent company and a
subsidiary or between two subsidiaries.
Items which are assets in one group company and liabilities in another need to be cancelled out,
otherwise group assets and liabilities will be overstated

4.1 Intra-group balances

STEPS
Step 1
Check that current accounts agree before cancelling. They may not agree if goods or cash are in-transit
at year end.
Step 2
Make balances agree by adjusting for in-transit items in the receiving company's books.
 Cash in transit: Dr Cash, Cr Receivables
 Goods in transit: Dr Inventories, Cr Payables
Step 3
Cancel intra-group balances. Dr Group Payables, Cr Group Receivables

INTERACTIVE QUESTION 4: INTRA-GROUP TRADING

Extracts from the statement of financial position of Impala Ltd and its subsidiary Springbok Ltd at
31 March 20X4 are as follows.
Impala Springbok
Ltd Ltd
£ £
Receivable from Springbok Ltd 25,000 –
Payable to Impala Ltd – (20,000)

Springbok Ltd sent a cheque for £5,000 to Impala Ltd on 28 March 20X4, which Impala Ltd did not
receive until 2 April 20X4.
SOLUTION
Steps 1 and 2
Assume that Impala Ltd had received the cash from Springbok Ltd.
Impala Springbok
Ltd Ltd
£ £

Receivable from Springbok Ltd

Cash and cash equivalents

Payable to Impala Ltd

DRAFT
Financial Accounting and Reporting 12: Group accounts: consolidated statement of financial position 125

Step 3
Cancel inter-company balances on consolidation, leaving just the cash in transit in the consolidated
statement of financial position.
£
Cash and cash equivalents

5 Unrealised intra-group profit

Each company in a group is a separate trading entity and may sell goods to another group member at a
profit. If these goods remain in inventories at the end of the reporting period this profit is unrealised
from the group's point of view.
Unrealised profits must be eliminated from the statement of financial position on consolidation to
prevent the overstatement of group profits.
In the CSFP inventories must be valued at the lower of cost and net realisable value to the group.
Where goods transferred at a profit are still held at the year end the unrealised profit must be
eliminated on consolidation.
This is achieved by creating a provision for unrealised profit (PURP) in the company making the sale.

STEPS
Step 1
Calculate the amount of inventories remaining at the end of the reporting period.
Step 2
Calculate the intra-group profit included in it (may involve using margins or mark ups).
Step 3
Make a provision against the inventories to reduce them to cost to the group (or NRV if lower).
Remember:
PURP = total profit on inter-company sale x proportion (%) of goods left in group inventories at
the year end

5.1 Parent sells goods to a subsidiary

WORKED EXAMPLE 2: INTRA-GROUP PROFIT

Ant Ltd, a parent company, sells goods which cost £1,600 to Bee Ltd for £2,000. Ant Ltd owns 75% of
the shares in Bee Ltd. Bee Ltd still holds all the goods in inventories at the year end.
In the single entity accounts of Ant Ltd the profit of £400 will be recognised.
In the single entity accounts of Bee Ltd the inventory will be valued at £2,000.
A consolidation adjustment is therefore necessary as follows:
£ £
Dr Seller's (Ant Ltd's) retained earnings (ie adjust in retained earnings working) 400
Cr Inventories in consolidated statement of financial position 400
Note, in this example, as the parent was the seller the unrealised profit is all 'owned' by the
shareholders of Ant Ltd. None is attributable to the non-controlling interest.

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126 12: Group accounts: consolidated statement of financial position Financial Accounting and Reporting

5.2 Subsidiary sells goods to parent or to another subsidiary

WORKED EXAMPLE 3: INTRA-GROUP PROFIT

Using the worked example above, if we now assume that Bee Ltd sold the goods to Ant Ltd the
adjustment would be as follows:
£ £
Dr Seller's (Bee Ltd's) retained earnings (ie adjust in net assets working) 400
Cr Inventories in consolidated statement of financial position 400
The net assets of the subsidiary making the sale at the end of the reporting period will be reduced by
the amount of the unrealised profit. Any subsequent calculations based on this net assets figure will
therefore be affected as follows:
 The group share of the post-acquisition retained earnings of the subsidiary will be reduced, ie
the group will bear its share of the adjustment.
 The non-controlling interest will be based on these revised net assets ie the non-controlling
interest will bear its share of the adjustment.

INTERACTIVE QUESTION 5: UNREALISED PROFITS

P Ltd owns 80% of S Ltd, which it acquired when the retained earnings of S Ltd were £20,000. No
goodwill was acquired. Statements of financial position at the end of the current accounting period are
as follows.
P Ltd S Ltd
£ £
Assets 170,000 115,000

Share capital 30,000 10,000

Retained earnings 100,000 65,000
Equity 130,000 75,000
Liabilities 40,000 40,000
170,000 115,000

During the current accounting period S Ltd sold goods to P Ltd for £18,000, which gave S Ltd a profit of
£6,000. At the end of the reporting period half of these goods were included in P Ltd's inventories.
Requirement
Show how the adjustment to eliminate unrealised profits will appear in the consolidation workings for
P Ltd.
SOLUTION
£ £

Dr

Cr

DRAFT
Financial Accounting and Reporting 12: Group accounts: consolidated statement of financial position 127

WORKINGS
(1) Group structure
P Ltd

80%
S Ltd
(2) S Ltd net assets
End of the reporting period Acquisition Post- acquisition
£ £ £
Share capital
Retained earnings
Per question

(3) Non-controlling interest

£
Non-controlling interest at acquisition
Share of post-acquisition

(4) Retained earnings

£
P Ltd
Share of S Ltd

6 Non-current asset transfers

If the asset is transferred at a profit:
 The selling company will have recorded a profit or loss on sale
 The purchasing company will have recorded the asset at the amount paid to acquire it, and will
use that amount as the basis for calculating depreciation.
 The consolidated statement of financial position must show assets at their cost to the group,
and any depreciation charged must be based on that cost.

DRAFT
128 12: Group accounts: consolidated statement of financial position Financial Accounting and Reporting

The adjustment in the consolidated statement of financial position can be calculated as follows:
£
Carrying amount of NCA at year end X
Less: Carrying amount of NCA at year end if transfer had not been made (X)
Unrealised profit X

The adjustment is then made as:

£ £
Dr Selling company retained earnings (and COS – see chapter 13) X
Cr NCA carrying amount in consolidated statement of financial position X

6.1 Parent sells non-current asset to subsidiary

INTERACTIVE QUESTION 6: NON-CURRENT ASSET TRANSFERS

P Ltd owns 80% of S Ltd. P Ltd transferred to S Ltd a non-current asset at a value of £15,000 on
1 January 20X7. The original cost to P Ltd was £20,000 and the accumulated depreciation at the date
of transfer was £8,000. The asset had, and still has, a total useful life of five years.
Requirement
Calculate the consolidated statement of financial position adjustment at 31 December 20X7.
Fill in the proforma below.
SOLUTION
Following the transfer the asset will be included at
£
Cost
Less: Depreciation

Had the transfer not been made, the asset would stand in the books at
£
Cost
Less: Accumulated depreciation at date of transfer
Provision for current year

Overall adjustment in CSFP

£ £

Dr Seller's (P Ltd's) retained earnings

(ie adjust in retained earnings working)

Cr Non-current assets

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Financial Accounting and Reporting 12: Group accounts: consolidated statement of financial position 129

Subsidiary sells non-current asset to parent

The amount of the adjustment is calculated as before.
The adjustment is then made as follows:
£ £
Dr Seller's (S Ltd) retained earnings (ie adjust in net assets working) X
Cr NCA carrying amount in consolidated statement of financial position X
As the subsidiary is the seller the adjustment to retained earnings will be made in the net assets
working, subsequent calculations based on this net assets figure will therefore be affected as follows:
 The group share of the post-acquisition retained earnings of the subsidiary will be reduced ie. as
for sale of inventories
 The non-controlling interest will be based on these revised net assets, ie as for sale of inventories.

7 Fair value adjustments

The identifiable assets and liabilities of a subsidiary are brought into the consolidated financial
statements at their fair value.
The difference between fair values and carrying amounts is an adjustment made only for the purposes
of the consolidated financial statements.
The increase (or decrease) in value is treated as a consolidation adjustment at acquisition and also
applies in subsequent years if the asset is still held.
Fair value increase Create a fair value adjustment line (fair value uplift) in the net assets working
at acquisition and at the end of the reporting period.
Fair value decrease The fair value adjustment line in the net assets working will be negative at
acquisition and at the end of the reporting period.

INTERACTIVE QUESTION 7: FAIR VALUE ADJUSTMENTS

P Ltd acquires 60% of S Ltd on 31 December 20X4 for £80,000. The statement of financial position of
S Ltd at this date is as follows. Two years later, at 31 December 20X6 the retained earnings balance
stands at £110,000.
£
Freehold land (fair value £30,000) 20,000
Plant (fair value £10,000 with 5 year remaining life at acquisition) 5,000
Sundry assets (carrying amount = fair value) 130,000
155,000

Share capital 20,000

Retained earnings 85,000
Equity 105,000
Liabilities 50,000
155,000

Requirement
Calculate the fair value adjustments required in the net asset table and the goodwill arising on the
acquisition of S Ltd.

DRAFT
130 12: Group accounts: consolidated statement of financial position Financial Accounting and Reporting

SOLUTION
(1) Group structure
P Ltd

60%

S Ltd
(2) Net assets of S Ltd
Year end Acquisition Post acquisition
£ £
Share capital 20,000 20,000
Retained earnings 110,000 85,000
Fair value adjustments:
Land
Plant

Adjust Goodwill Retained earnings

SOFP (below) and NCI workings

(3) Goodwill
£
Consideration transferred
Plus: Non-controlling interest at acquisition
Less: FV of net assets at acquisition

8 Other consolidation adjustments

8.1 Other reserves in a subsidiary
Other reserves at acquisition form part of the net assets at acquisition, ie they should be recorded in
the net assets working at acquisition.
The group share of any post acquisition movement in other reserves should be recognised in the
consolidated statement of financial position.
If a subsidiary is loss-making or has any other negative reserves the group will consolidate its share of
the post-acquisition losses/negative reserves.

8.2 Accounting policy alignments

On consolidation uniform accounting policies must be applied for all amounts.
If the parent company and subsidiary have different accounting policies the balances in the
subsidiary's financial statements must be adjusted to reflect the accounting policies of the parent
company. These adjustments are made in the net assets working.

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Financial Accounting and Reporting 12: Group accounts: consolidated statement of financial position 131

9 Comprehensive example of Consolidated Statement of Financial position

INTERACTIVE QUESTION 8: CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The following summarised statements of financial position of Kavannagh plc and Morse Ltd as at
31 December 2010 are as follows
Kavannagh plc Morse Ltd
Non-current assets £ £
Property, plant and equipment 98,000 172,000
Investments 153,000 0
Current assets
Inventories 12,000 8,000
Trade and other receivables 7,500 5,000
Cash and cash equivalents 1,500 3,000
Total assets 272,000 188,000

Equity and liabilities

Share Capital (£1 shares) 100,000 60,000
Share premium 8,000 5,000
Revaluation surplus 10,000 25,000
Retained earnings 120,000 68,000
Total equity 238,000 158,000

Non-current liabilities (6% loan notes) 0 20,000

Current liabilities
Trade payables 24,000 6,000
Current tax 10,000 4,000
Total equity and liabilities 272,000 188,000

The following additional information is provided

(1) On 1 January 2009, Kavannagh acquired 48,000 shares in Morse Ltd for £140,000 when the
retained earnings of Morse Ltd were £50,000 and the balance on its revaluation surplus was
£20,000, and 50% of its 6% loan notes on the same day.
(2) At acquisition the fair value of Morse Ltds assets were considered equal to their carrying
amount, with the exception of an item of plant with a remaining life of 4 years that had a fair
value of £4,000 in excess of its carrying amount, and land with a fair value of £10,000 in excess
of its carrying amount.
(3) The non-controlling interest at acquisition is to be valued at fair value. The fair value of the
non-controlling interest at acquisition was £29,000.
(4) At the year end Kavannagh plc had a balance owing from Morse Ltd of £1,500. However the
corresponding payable in Morse Ltd was only £1,000, the difference being due to cash in transit
at 31 December 2010.
(5) At the 31 December 2010, the inventories of Morse Ltd included £4,000 of goods purchased
from Kavannagh plc who had sold the goods at cost plus 25%.
(6) An impairment review carried out at 31 December 2010 revealed that the goodwill in Morse Ltd
had become impaired by 10%.

DRAFT
132 12: Group accounts: consolidated statement of financial position Financial Accounting and Reporting

SOLUTION
Consolidated statement of financial position as at 31 December 2010
Kavannagh Group plc
Non current assets £

Property, plant and equipment

Investments

Goodwill

Current assets

Inventories

Trade and other receivables

Cash and cash equivalents

Total assets

Equity and liabilities

Share Capital (£1 shares)

Share premium

Revaluation surplus

Retained earnings

Non-controlling interest

Total equity

Non-current liabilities (6% loan notes)

Current liabilities

Trade payables

Current tax

Total equity and liabilities

DRAFT
Financial Accounting and Reporting 12: Group accounts: consolidated statement of financial position 133

Standard workings:
(1) Establish group structure (% shareholdings and dates of acquisitions)

(2) Set out net assets of Morse Ltd

At year end At acquisition Post acquisition
£ £ £

Share capital

Share premium

Revaluation surplus

Retained earnings

PURP adjustment

Fair value adjustment

(3) Calculate goodwill

£

Consideration transferred

Plus: Non-controlling interest at acquisition

Less: Net assets at acquisition (see W2)

Impairment to date

Balance c/f

(4) Calculate non-controlling interest (NCI) at year end

£

Non-controlling interest at acquisition (W3)

Share of post acquisition (W2)

Less non-controlling interest share of any goodwill impairment if calculated

using the fair value method

Non-controlling interest at the year-end

DRAFT
134 12: Group accounts: consolidated statement of financial position Financial Accounting and Reporting

(5) Calculate retained earnings

£

P Ltd (100%)

S Ltd (share of post-acquisition retained earnings (see W2))

Goodwill impairment to date (group share only)

(6) Calculate revaluation surplus

£

P Ltd (100%)

S Ltd (share of post-acquisition revaluation surplus (see W2))

(7) PURP

DRAFT
Financial Accounting and Reporting 12: Group accounts: consolidated statement of financial position 135

10 UK GAAP Comparison
IFRS UK GAAP
Non-controlling IFRS 3 allows a choice measurement Non-controlling interest is always valued at
interest at fair value or share of net assets its share of net assets (proportionate
method).
Acquisition related Must be expensed to the profit or loss Acquisition related costs must be added to
costs as incurred. the cost of the investment and thus affect
goodwill.
Contingent Measured at “fair value” at acquisition A reasonable estimate of the contingent
consideration with subsequent adjustments within consideration is included within goodwill
the measurement period and relating calculation where probable that the amount
to circumstances at the acquisition will be paid and it can be measured reliably.
date, being related back to the All subsequent adjustments are related back
acquisition date. All other adjustments to the acquisition date, thus affecting
should be recognised in the profit or goodwill.
loss.
Goodwill IFRS 3 requires annual impairment Goodwill is usually amortised over its
reviews. estimated useful life. There is a rebuttable
Negative goodwill in immediately assumption that this will not exceed 10 years.
recognised as a gain in the profit or Negative goodwill is recognised as a separate
loss. item within goodwill (a negative asset).
Impairments to goodwill cannot be The reversal of an impairment to goodwill is
reversed. allowed.
Exclusion No such specific exemption exists. A subsidiary should be excluded from
consolidation if severe long term restrictions
prevent the parent exercising control.

DRAFT
136 12: Group accounts: consolidated statement of financial position Financial Accounting and Reporting

11 Knowledge diagnostic
Before you move on to question practice, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you explain how to measure contingent consideration and deferred

consideration?

Can you explain how the identifiable assets acquired and liabilities assumed by the
acquirer should be measured and recognised on acquisition? Can you explain the
exceptions in IFRS 3 to the usual recognition requirements for intangible assets and
contingent liabilities?

Can you write out the standard workings for the consolidated statement of
financial position?

If group companies trade with each other and the goods remain unsold at the
period end, what consolidation adjustments are likely to be needed?

If the fair value of the identifiable assets acquired and liabilities assumed by the
acquirer is higher than the carrying amount of the net assets of the acquiree at
acquisition, can you explain what consolidation adjustments would be necessary?
Which working would these adjustments be reflected in?

Can you explain the key differences between UK GAAP and IFRS Standards for the
preparation of a consolidated statement of financial position?

DRAFT