STRATHMORE UNIVERSITY

SCHOOL OF ACCOUNTANCY
ACCA PART I
FINANCIAL ACCOUNTING

INTRODUCTION TO GROUP ACCOUNTS: BASIC CONSOLIDATION

Parent

An entity that has one or more subsidiaries.

Subsidiary

An entity, including an unincorporated entity such as a partnership, which is controlled by another entity (known
as the parent).

Control

The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities

Consolidated or group financial statements

The financial statements of a group presented as those of a single economic entity.

Non-controlling interest

Non-controlling interest (NCI) arises when the parent entity controls a subsidiary but does not own 100% of it; e.g.
if P owns only 70% of the ordinary shares of S, there is a NCI of 30%

Trade/simple investment

An investment in the shares of another entity that is held for the accretion of wealth, and is not an associate or a
subsidiary. Trade investments are shown as investments under non-current assets in the consolidated SFP of the
group.

Subsidiary within a group structure

P is an individual legal entity, known as the parent. The parent is an entity that has one or more subsidiaries.

S is an individual legal entity, known as the subsidiary.

P owns more than 50% of the ordinary shares of S. It has enough voting power to appoint all the directors of S. P
has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Although P and S remain distinct, in economic substance, they can be regarded as a single unit - the group.

Although control is usually based on ownership of more than 50% of voting power, IAS 27 lists the following
situations where control exists, even when the parent owns only 50% or less of the voting power of an enterprise.
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1. The parent has power over more than 50% of the voting rights by virtue of agreement with other
investors
2. The parent has power to govern the financial and operating policies of the enterprise by statute or under
an agreement

3. The parent has the power to appoint or remove a majority of members of the board of directors (or
equivalent governing body)

4. The parent has power to cast a majority of votes at meetings of the board of directors

N/B Consolidated financial statements present the results of the group; they do not replace the financial
statements of the individual group companies.

The consolidated statement of financial position shows

 The net assets of the whole group (P + S)

 The share capital of the group which always equals the share capital of P only and

 The retained profits, comprising profits made by the group (i.e. all of P’s historical profits + profits made
by S post-acquisition).

 The amount attributable to Non-controlling interest is calculated and shown separately on the face of the
consolidated SoFP

Goodwill

The value of a company will normally exceed the value of its net assets. The difference is goodwill. This
goodwill represents assets not shown in the statement of financial position of the acquired company such as
the reputation of the business and the loyalty of staff.

Calculation of Goodwill using the Full Goodwill method:

Fair value of consideration X

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

Value of the subsidiary

Where less than 100% of the subsidiary is acquired, the value of the subsidiary comprises two elements:

 The value of the part acquired by the parent;

 The value of the part not acquired by the parent, known as the non-controlling interest(NCI)

The Mechanics of Consolidation

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(W1)Establish the Group Structure:

Identify whether there is a parent-subsidiary relationship (i.e. does the parent have control?).

Identify the percentage shareholding of the parent and the Non-Controlling interest and the date the shares were
acquired.

(W2)Net Assets of Subsidiary

At date of Acquisition At the Reporting Date

Share Capital X X

Share Premium X X

Revaluation Reserve X X

Retained Earnings X X

X X

The total share capital and share premium from the subsidiary SoFP should be unchanged at both the date of
acquisition and the reporting date.

(W3) Goodwill

Fair Value of consideration paid X

Fair Value of non-controlling interest (NCI) at acquisition X

Less: FV of net assets at acquisition (W2) (X)

Goodwill on acquisition X

(W4) Non-controlling interest

Fair Value of NCI at acquisition X

NCI share of post-acquisition reserves (W2) X

(W5) Group Retained earnings

Parents retained earnings (100%) X

Parent`s % of subsidiary post acquisition Ret.Earnings X

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Questions

1. At 1 January 20X4 Yogi acquired 80% of the share capital of Bear for $1,400,000. At that date the share
capital of Bear consisted of 600,000 ordinary shares of 50c each and its reserves were $50,000.

The fair value of the Non-controlling interest was valued at $525,000 at the date of acquisition. What is the value
of goodwill in the consolidated statement of financial position of Yogi and its subsidiary Bear as at 31 December
20X8?

2. At 1 January 20X8 Tom acquired 80% of the share capital of Jerry for $100,000. At that date the share
capital of Jerry consisted of 50,000 ordinary shares of $1each and its reserves were $30,000.

At 31 December 20X9 the reserves of Tom and Jerry were as follows:

Tom $400,000

Jerry $50,000

What is the value of group reserves that should appear in the consolidated statement of financial position of Tom
and its subsidiary?

3. At 1 January 20X6 Fred acquired 75% of the share Capital of Barney for $750,000. At that date the share
capital of Barney consisted of 20,000 ordinary shares of $1 each and its reserves were $10,000.

The fair value of the non-controlling interest was valued at $150,000 at 1 January 20X6. Calculate the goodwill
value in the consolidated SoFP for Fred and its subsidiary Barney.

4. At 1 January 20X6 Gary acquired 60% of the share capital of Barlow for $35,000. At that date the share
capital of Barlow consisted of 20,000 ordinary shares of $1 each and its reserves were $10,000. At 31
December 20X9 the reserves of Gary and Barlow were as follows:

Gary $40,000

Barlow $15,000

At the acquisition date the fair value of the Non-controlling interest was valued at $25,000. Calculate the value of
Good will and the value of Non-controlling interest to be taken to the consolidated statement of SoFP of Gary and
its subsidiary Barlow.

5. At 1 January 20X8 Williams acquired 65% of the share capital of Barlow for $300,000. At that date the
share capital of Barlow consisted of 400,000 ordinary shares of 50c each and its reserves were $60,000. At
31 December 20X9 the reserves of Williams were as follows:

Williams $200,000

Barlow $75,000

The fair value of the Non-controlling interest was valued at $50,000 at the date of acquisition. Calculate the
value of the Goodwill and the NCI to be reported in the consolidated statement of financial position of
Williams as at 31 December 20X9.

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6. Swing purchased 80% of Cat's equity on 1 January 20X8 for $120,000 when Cat’s retained earnings were
$50,000. The fair value of the non-controlling interest on that date was $40,000.
As at 31 Dec 20X8 Swing and Cat had the following:
Swing Cat
Equity 2,000,000 100,000
Retained Earnings 400,000 200,000
Calculate the Goodwill, the value of Non-controlling Interest and the Retained Earnings to the
consolidated statement of Swing and its subsidiary Cat.

7. Prestend purchased 2,800,000 shares for 3,345,000 in Northon a year ago when Northon had retained
earnings of $60,000. The fair value of the non-controlling interest at the date of acquisition was
$1,415,000. As at 31 Dec 20X7 Prestend and Northon had the following:
Prestend Northon
Equity 9,000,000 4,000,000
Retained earnings 525,000 200,000
Calculate the Goodwill, the value of Non-controlling Interest and the Retained Earnings to the
consolidated statement of Pretend and its subsidiary Northon.

8. On 1 January 20X0 Alpha Co purchased 90,000 ordinary $1 shares in Beta Co for $270,000. At that date
Beta Co's retained earnings amounted to $90,000 and the fair values of Beta Co's assets at acquisition
were equal to their book values.
Three years later, on 31 December 20X2, the statements of financial position of the two companies
were:
Alpha Co Beta Co
$ $

Ordinary shares of $1 each 200,000 100,000

Retained earnings 210,000 160,000
410,000 260,000
The share capital of Beta Co has remained unchanged since 1 January 20X0. The fair value of the non- controlling
interest at acquisition was $42,000.
Required:
(a) What amount should appear in the group's consolidated statement of financial position at 31 December
20X2 for goodwill?
(b) What amount should appear in the group's consolidated statement of financial position at 31 December
20X2 for non-controlling interest?
© What amount should appear in the group's consolidated statement of financial position at 31 December
20X2 for retained earnings?
D acquired an 80% holding in J on 1 January 20X8 by paying a consideration of 60,000. At this date J`s retained
earnings stood at $20,000. On this date, the fair value of the 20% Non-controlling shareholding in J was $12,500.

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1. D&J

The statements of financial position of D and J as at 31 December 20X8 were as follows:

D J

$ $

Non-current assets:

Property plant and Equipment 85,000 18,000

Investments:

Shares in J 60,000

Current Assets 160,000 84,000

305,000 102,000

Equity:

Ordinary $1 shares 65,000 20,000

Share premium 35,000 10,000

Retained Earnings 70,000 25,000

170,000 55,000

Current liabilities 135,000 47,000

305,000 102,000

Required: Prepare the consolidated statement of financial position for D Ltd and its subsidiary J as at 31 December
20X8.