IFRS Workbooks Consolidation Part2final

for Accounting Professionals
CONSOLIDATION PART 2 2011

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CONSOLIDATION PART 2
IFRS WORKBOOKS (1 million downloaded)

Welcome to IFRS Workbooks! These are the latest versions of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation. The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade their knowledge, understanding and skills. Each workbook is a self-standing short course designed for approximately of three hours of study. Although the workbooks are part of a series, each one is independent of the others. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. A basic knowledge of accounting is assumed, but if any additional knowledge is required this is mentioned at the beginning of the section. Having written the first three editions, we want to update them and provide them to you to download. Please tell your friends and colleagues. Relating to the first three editions and updated texts, the copyright of the material contained in each workbook belongs to the European Union and according to its policy may be used free of charge for any non-commercial purpose. The copyright and responsibility of later books and the updates are ours. Our copyright policy is the same as that of the European Union. We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers) who led the projects and all friends at Bankir.Ru for hosting the books. TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels). The help of Philip W. Smith (editor of the third edition) and Allan Gamborg, project managers and Ekaterina Nekrasova, Director of PricewaterhouseCoopers, who managed the production of the Russian version (2008-9) is gratefully acknowledged. Glyn R. Phillips, manager of the first two projects conceived the idea, designed the workbooks and edited the first two versions. We are proud to realise his vision.
Robin Joyce
Professor of the Chair of International Banking and Finance Financial University under the Government of the Russian Federation Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2011 Updated
CONTENTS
CONTENTS......................................................................3 1. Consolidation Introduction........................................3 2. Definitions...................................................................4 3.Intra Group Trading.....................................................5 4.Dividends Paid out of Pre-Acquisition Profits........13 5. Dividends Paid out of Post-Acquisition Profits.....15 6. Intra-Group Asset Sales...........................................18 7.Vertically Integrated Groups.....................................19 8.Consolidated Income Statements............................21 9. Multiple Choice Questions.......................................24 10. Exercise Questions.................................................25 11.Solutions..................................................................37
(i) identifying the acquirer; (ii) determining the acquisition date; (iii) recognising and measuring the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree; and (iv) recognising and measuring goodwill or a gain from a bargain purchase. Before commencing a consolidation, the accountant should have the full financial statements of the parent and subsidiaries produced as of the same date, and using the same accounting policies. Where possible, all subsidiary year-ends must be the same as the parent undertaking. Under IFRS 10, the maximum permitted difference is 3 months. Adjustment should be made for any significant differences created by any subsidiary having a different accounting date. The length of reporting periods, and any difference in the reporting dates, should be consistent from period to period. This will make the corresponding figures from previous accounting periods more easily comparable. Transactions and balances between group undertakings should be l reconciled and listed. Where an undertaking has been purchased or sold, the financial statements at the time of acquisition or sale should be on hand. Spreadsheets are ideal for producing consolidated balance sheets and income statements, although bespoke consolidated software is available. 3
1.
Aim
Consolidation Introduction
The aim of this workbook is to assist in understanding consolidation methodology for IFRS. Approach To consolidate a business combination requires: http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
At a practical level, to ensure consistency of treatment, a consolidation pack is prepared for each group company detailing standard adjustments, reconciliations, forms, and spreadsheets. This makes assembly of the final group reports much simpler and reduces the possibilities of different interpretations by the financial controllers of each group company. Other Workbooks Consolidation 1 and 3 concentrate on practical consolidation and dealing with Associates and Joint Ventures. The IFRS 3 workbook concentrates on that standard which provides guidance on specific points, such as the purchase of companies in stages, loss of control but retention of an associate and reverse takeovers. IAS 27 has been replaced by IFRS 10 for consolidated financial statements. IFRS 11 has replaced IAS 31. The new standards are effective from 2013. The earlier standards can be used until then. 2. Definitions
Subsidiary A subsidiary is an undertaking that is controlled by another. Group, or business combination Two or more companies where one company controls the other(s). Consolidated accounts will be required if one business controls another, whatever are the means of control. Dissimilar business activities must be consolidated, if they controlled by the parent undertaking. Control Control is the power to govern the financial and operating policies of an undertaking to obtain benefits. Indications of control are:

Ownership of more than 50% of the voting rights. Effective control over more than 50% of the voting rights. For example, a husband owns 30% and a wife owns 40%. As they are connected parties, they can exercise control over the subsidiary. Controlling the composition of the board of directors. For example if A controls B and B controls C, the A controls C.
Undertaking An undertaking is any business, either incorporated or unincorporated. Parent (now called controlling interests) A parent is an undertaking that controls another undertaking.
Minority Interest (now called non-controlling interests) Minority interest is the part of the net assets of a subsidiary attributable to others outside the group.
Fair value The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. (IFRS 13) Monetary assets Monetary assets are money held, assets receivable, and liabilities payable, in cash or cash equivalents. Uniting of Interests Uniting (or pooling) of interests was an alternative method of consolidation. It reflects the merger of two, or more, interests, where no undertaking can be identified as the acquirer. IFRS 3 eliminated this method as an option for acquisitions. Associate An undertaking in which the parent has significant influence, but is neither its subsidiary, nor part of a joint venture of the parent. Indications of significant influence are:

Intra Group Trading When the parent trades with a subsidiary, the parents balance sheet shows an asset/liability, and an equal, but opposite, asset/liability is shown in the balance sheet of the subsidiary. On consolidation, these always cancel each other out. 3. Intra Group Trading Example 1 Parent Balance Sheet Assets Cash Accounts receivable Investments Fixed Assets 400 1000 200 100 1700 Liabilities Accounts payable Accruals Shareholders Funds Profit and loss Account 800 400 500 1700
The parent buys 100% of the subsidiary. It pays 270 cash. Then, the parent loans 100 to the subsidiary. Subsidiary Balance Sheet Assets Cash Accounts receivable Investments Fixed Assets Liabilities 20 Accounts payable 400 100 50 Shareholders Funds 570 300
Ownership of 20-50% of the voting shares Representation on the Board of Directors
Joint Venture A joint venture is an undertaking subject to the joint control of two or more enterprises. The joint control is usually governed by a contract between the parties.
270 570 5
Parent Balance Sheet (after acquisition & loan transaction) Assets Cash Accounts receivable Investments Investment in S Loan to subsidiary Fixed Assets Liabilities 30 Accounts payable 1000 200 Accruals 270 100 100 Shareholders Funds 1700 800 400 500 1700 Note: Cash= 30+120=150 Investments= (470-270)+100 =300 The loan has been eliminated on consolidation. All transactions between parent and subsidiary are accounted for through the subsidiary account (in the parents books) and the parent account (in the subsidiaries books). These accounts are always equal and opposite, and cancel out on consolidation. In the next example, the subsidiary is 100% owned and cost 270 cash. The parent buys an investment security for 100 from a subsidiary that paid 90 for it. No cash has been transferred between the companies to settle this transaction at the balance sheet date. The subsidiary shows 100 owing from the parent company and a profit of 10 from the sale of the investment. Example 2 Intra Group Profit: 6 Assets Cash Accounts receivable Investments Fixed Assets Liabilities 150 Accounts payable 1400 300 Accruals 150 Shareholders Funds 2000 1100 400 500 2000
Note: Cash= 400-270-100=30 Subsidiary Balance Sheet Assets Cash Accounts receivable Investments Fixed Assets Liabilities 120 Accounts payable 400 Loan from Parent 100 50 Shareholders Funds 670 300 100 270 670
Note: Cash= 20+100=120 The asset in the parent balance sheet is equal, but opposite, to the liability in the subsidiary balance sheet. Group Balance Sheet http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Parent Balance Sheet (after acquisition) Assets Cash Accounts receivable Investments Investment in subsidiary Fixed Assets Liabilities 30 Accounts payable 1000 200 Accruals 270 100 Shareholders Funds 1600 800 300 500 1600 The Parents Balance Sheet shows an increase in investments of 100 and 100 owing to the subsidiary. Parent Balance Sheet (after transaction) 300 Assets Cash 30 Accounts receivable 1000 Investments 300 Investment in Subsidiary 270 Fixed Assets 100 1700 Note: Investments= 200+100=300 The profit is not realised as far as the group is concerned so it has to be eliminated on consolidation. 300 Group Balance Sheet Liabilities 50 Accounts Liabilities Accounts payable Accruals Subsidiary account Shareholders Funds 800 300 100 500 1700 Notes: Dr Parent account 100 Cr Profit 10 Cr Investments 90 Fixed Assets Funds 50 Profit 580 10 580
Subsidiary Balance Sheet (before transaction) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 20 Accounts payable 400 100 50 Shareholders Funds 570
270 570
Note: All investments are stated at cost Subsidiary Balance Sheet (after transaction) Assets Cash Accounts receivable Investments Parent account 20 400 10 100 Shareholders 270 Liabilities Accounts payable
Assets Cash
1100 7
payable Accounts receivable Investments Fixed Assets 1400 300 Accruals 150 Shareholders Funds 1900 300 500 1900
Note: Investments= 300-10+10=300 Details of the bookkeeping are on the next page:
Derivation of Group Figures Assets Cash Accounts receivable Investments Investment in S Parent Subsidiary Fixed Assets Liabilities Accounts payable Accruals Shareholders Funds TOTAL
Parent Dr 30 1000 300 270 100 100 800 300 500 1700 1700 Cr
Subsidiary Dr 20 400 10 100 50 300 280 580 580 Cr
Adjustments Dr Cr Dr
Total Cr
10 270
50 1400 300 150 1100 300
280 280 280 1900
500 1900
The adjustment eliminates the investment in subsidiary, and the 10 profit created by the intra group transaction.
Example 3 Realised Intra Group Profits The parent buys a security for 100 from a subsidiary that paid 90 for it, as in the previous example. Next the parent sold the investments to another client, outside the group, for 120. This means that the group profit on the transaction is 120-90=30. This profit is realised, as it has been sold outside the group. 20 of the profit is found in the parent and 10 in the subsidiary. In this example, the subsidiary is 100% owned, and cost 270 cash, as in the previous example. The Balance sheets are stated after both acquisition of subsidiary and the intra group purchase of the investment, but before sale outside the group. Parent Balance Sheet (same as in the previous example) Assets Cash Accounts receivable Investments Investment in subsidiary Fixed Assets Liabilities 30 Accounts payable 1000 300 Accruals 270 Subsidiary account 100 Shareholders Funds 1700 800 Subsidiary Balance Sheet (same as in the previous example) Assets Cash Accounts receivable Investments Parent account Fixed Assets Liabilities 20 Accounts payable 400 10 100 Shareholders Funds 50 Retained Earnings 580 300
270 10 580
Then the parent sells the investment to a third party for 120 cash. In this case, all of the profit is realised as the investment has been sold outside the group. Note that even if the subsidiary is only partly-owned, all unrealised profit is fully eliminated on consolidation. Parent Balance Sheet (after Sale) Assets Cash Accounts receivable Investments Investment in S Fixed Assets Liabilities 150 Accounts payable 1000 Accruals 200 Subsidiary a/c 270 Shareholders Funds 100 Retained Earnings 1720 800 300 100 500 20 1720
300 100 500 1700
Notes: http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 10
Cash= 30+120=150 Investments= 300-100=200 The profit is now realised by the group. The retained earning is the profit on sale attributable to the parent. Group Balance Sheet (after sale) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 170 Accounts payable 1400 210 Accruals 150 Shareholders Funds Retained Earnings 1930 1100 In the following examples, I/B refers to Income Statement and Balance Sheet (SFP). EXAMPLE 1. partly-owned subsidiaries P has a subsidiary S, of which it owns 70%. At the balance sheet date S has inventories that it bought from P at a cost of 100. P made a profit of 20 on the sale. As the profit was earned by the parent, all the profit is eliminated. (There is no impact on minority interests.) Revenue Cost of sales Inventory Reduction of group sales, cost of sales and profit in Ps inventory I/B I I B DR 100 CR 80 20
300 500 30 1930
Notes: Cash= 150+20=170 Accounts Receivable= 1000+400= 1400 Investments= 200+10=210 Accounts payable= 800+300= 1100 Retained Earnings= 10+20=30 This is the parents profit on sale (20) and the post acquisition profit of the subsidiary (10).
EXAMPLE 2. partly-owned subsidiaries P has a subsidiary S, of which it owns 70%. At the balance sheet date P has inventories that it bought from S at a cost of 100. S made a profit of 20 on the sale.
Intra-group profits partly-owned subsidiaries and associates http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Revenue
I/B I
DR 100
CR 11
Cost of sales Inventory Reduction of group sales, cost of sales and profit in Ps inventory Minority interests (balance sheet) (30%*20) Minority interests (income statement) Reducing the profit related to minority interests EXAMPLE 3. - associates P has an associate A, of which it owns 20%. At the balance sheet date A has inventories that it bought from P at a cost of 100. P made a profit of 25 on the sale. As the profit was earned by the parent, the parents share of profit is eliminated. Revenue (20%*100) Cost of sales Investment in associate (20%*25) Reduction of group sales, cost of sales and investment in associate I/B I I B DR 20 15 5 CR I B B I 6 6 I/B I B DR 5 5 CR 80 20 EXAMPLE 4. - associates P has an associate A, of which it owns 20%. At the balance sheet date P has inventories that it bought from A at a cost of 100. A made a profit of 25 on the sale.
Share of income of associates Investment in associate (20%*25) Reduction of group net income, and investment in associate
EXAMPLE - Associates and extent of inter-group elimination Undertaking C is a 20% investor in an associate, undertaking D. (see Consolidation Book 3 for accounting for associates) During the year, undertaking C entered into the following transactions with undertaking D: - sale of inventory with a cost price of 100 for 200. The stock has not been sold by undertaking A at year end; and - providing management services to undertaking D and invoicing 200 for these services. How should undertaking C account for the revenue arising from the sale of inventory and management services? Many of the procedures appropriate to the application of the equity method are similar to the consolidation procedures. Unrealised profits and losses arising from downstream transactions 12
are eliminated to the extent that the investor is transacting with itself. While the inventory remains on the associates balance sheet, the associate will not be recording an expense in its income statement. Therefore a consolidation entry, reducing the revenue arising from the sale of the inventory by 40 (200 x 20%), is required to eliminate the unrealised portion of the gain made in undertaking C. The revenue arising from the management services would not be adjusted, as the management services cost is realised in the associate. As undertaking D is equity- accounted for, 40 (200 x 20%) - representing the portion of the cost relating to undertaking C - will be reflected in the consolidated financial statements of undertaking C; no further elimination entry is therefore required. EXAMPLE - Discontinued operations and intra-group balances Group E plans to sell one of its subsidiaries F. F meets the criteria in IFRS 5 to be classified as a disposal group held for sale and also to be presented as discontinued. IFRS 5 requires that operations classified as held for sale are measured at the lower of carrying value and fair value less costs to sell. The net assets of F to be sold include various trading balances with other members of group E. Should these intra-group balances form part of the fair value less cost to sell of F that would be presented separately as discontinued in the consolidated financial statements of E? IFRS 5 does not provide guidance on the treatment of intra-group balances within disposal groups classified as held for sale. It does not provide any relief from the requirement to apply IFRS 10. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng Undertaking E must therefore continue to eliminate the intra-group balances between F and the rest of the group in accordance with the normal consolidation requirements, and present the disposal group excluding the eliminated balances. The net assets of F should be presented as held for sale, excluding the intra-group balances. However, E should disclose any material intra-group balances, currently eliminated on consolidation that will be disposed of, and should disclose any relevant impact such balances may have on Fs fair value less costs to sell. 4. Dividends Paid out of Pre-Acquisition Profits Pre-acquisition dividends During the year, a subsidiary pays a dividend to its parent in excess of its post-acquisition reserves. The parent has early adopted the recent amendment to IAS 27 (now IFRS 10). How does the parent account for the dividend paid out of preacquisition profits? Dividends paid from pre-acquisition profits of a subsidiary are now recognised in profit or loss and are no longer recognised as a deduction from the investment in subsidiary. However, if there is evidence of impairment, this could trigger an impairment test in terms of IAS 36, Impairment of Assets. Triggers include: a) if the carrying amount of the investment in the subsidiary exceeds the carrying amount in the consolidated financial statements of the subsidiarys net assets, including the associated goodwill; and 13
b) if the dividend exceeds the total comprehensive income of the subsidiary in the period the dividend is declared. Example 4 Parent Balance Sheet (pre-acquisition) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 400 Accounts payable 1000 200 Accruals 100 Shareholders Funds Retained Earnings 1700 800 Assets Cash Accounts receivable Investments Investment in S Fixed Assets Liabilities 100 Accounts payable 1000 Accruals 200 300 Shareholders Funds 100 Retained Earnings 1700 800 300 500 100 1700
300 500 100 1700
S pays a dividend of 30, all out of pre-acquisition profits. The parent in its own accounts does treats this as investment income, but the value of S has fallen to 270. Therefore, the investment in S has been impaired and reduced in value by 30. The impairment is recorded in the Income Statement, eliminating the benefit of the dividend. The only benefit to the parent is that it receives 30 in cash.
Subsidiary Balance Sheet (pre-acquisition) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 50 Accounts payable 400 100 Share Capital 50 Retained Earnings 600 300
So, in the Parent Balance Sheet the net cost of S is reduced from 300 to (300-30)=270, and cash increased from 100 to 130. 270 30 600 Subsidiary Balance Sheet(after dividend payment) Assets Cash Liabilities 20 Accounts payable 300 14
The parent buys 100% of the subsidiary for 300. Parent Balance Sheet (post-acquisition) http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Accounts receivable Investments Fixed Assets 400 100 Share Capital 50 Retained Earnings 570 270 0 570 receivable Investments Fixed Assets 300 Shareholders Funds 150 Retained Earnings 2000 500 100 2000
Parent Balance Sheet (after dividend received) Assets Cash Accounts receivable Investments Investment in S* Fixed Assets Liabilities 130 Accounts payable 1000 200 Accruals 270 Shareholders Funds 100 Retained Earnings** 1700 800
Notes: Cash= 20+130=150 Accounts receivable= 400+1000=1400 Investments= 100+200=300 Fixed Assets= 50+100=150 Accounts payable= 300+800=1100 5. Dividends Paid out of Post-Acquisition Profits
300 500 100 1700
Dividends paid out of post-acquisition profits are income in the income statement of Parent and an expense for Subsidiary. Postacquisition profits may be considered to be group profits, as they are made after the subsidiary becomes a member of the group. On consolidation these cancel out (dividends received = dividends paid).
* After recording an impairment of 30 (300-30) ** 100 + 30 dividends received 30 impairment charge = 100
Consolidated Balance Sheet Assets Cash Accounts Liabilities 150 Accounts payable 1400 Accruals 1100 300
Example 5 Minority Interest and Dividends Paid from Pre- and Post- Acquisition Profits Parent Balance Sheet (before acquisition of subsidiary) Assets Liabilities 15
Cash Inventory Investments Fixed Assets 400 Accounts payable 1000 Accruals 200 Share Capital 100 Retained Earnings 1700 800 300 500 100 1700 S pays a dividend of 30, all out of pre-acquisition profits. P owns 60% of S. P receives a dividend of 18 (60% of 30), paid out of pre-acquisition profits. On consolidation this is treated as a return of capital (purchase price) but in the parent balance sheet it is treated as investment income. So, the net investment cost of S is reduced from 300 to 282 (30018) an impairment. Ss retained earnings are reduced from 30 to 0. The remaining 12 of dividend will be paid to the minority interest and reduces the value of the minority interest in the consolidated balance sheet.
Subsidiary Balance Sheet (before acquisition) Assets Liabilities Cash 50 Accounts 300 payable Inventory 400 Investments 100 Share Capital 270 Fixed Assets 50 Retained 30 Earnings 600 600 The parent buys 60% of the subsidiary for 300 cash. Parent Balance Sheet (after acquisition) Assets Liabilities Cash 100 Accounts payable Inventory 1000 Investments 200 Accruals Investment in S 300 Share Capital Fixed Assets 100 Retained Earnings 1700
800 300 500 100 1700
Subsidiary Balance Sheet (after dividend payment) Assets Cash Inventory Investments Fixed Assets Liabilities 20 Accounts payable 400 100 Share Capital 50 Retained 300 270 0 16
Earnings 570 570 Inventory= 1000+400=1400 Investments= 200+100=300 Goodwill= P has paid 300 for 60% of the assets of S (60% of (270+30) = 180) so goodwill= 300-180=120 Accounts payable= 800+300=1100 Minority Interest= 40%of 300 less dividend of 12= 108 The subsidiary then makes a profit of 100, (post-acquisition profits) which it pays out as a cash dividend. The parent companys balance sheet had not changed since receiving the first dividend. Parent Balance Sheet Assets Cash Inventory Investments S investment Fixed Assets Liabilities 178 Accounts payable 1000 200 Accruals 300 100 Share Capital Retained Earnings 1760 800 300 500 178 1760
Parent Balance Sheet (after receipt of dividend) Assets Cash Inventory Investments S investment Fixed Assets Liabilities 118 Accounts payable 1000 Accruals 200 Share Capital 282 100 Retained Earnings 1700 Consolidated Balance Sheet Assets Cash Inventory Investments Fixed Assets Goodwill Liabilities 138 Accounts payable 1400 300 Accruals Minority Interest 150 Share Capital 120 Retained Earnings 2108 1100 300 108 500 100 2108 800 300 500 100 1700
Notes: Cash (plus dividend)= 118+60%(100)=178 Retained Earnings= 118+60%(100)=178 Subsidiary Balance Sheet (after 2nd dividend payment- no change. All profits paid out in dividends) Assets Cash Liabilities 20 Accounts 300 17
Notes Cash= 118+20=138 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
payable Inventory Investments Fixed Assets 400 100 Share Capital 50 Retained Earnings 570 270 0 570 Example 6 Parent Balance Sheet (before acquisition) Assets Cash Inventory Investments Fixed Assets Liabilities 300 Accounts payable 1000 200 Accruals 100 Shareholders Funds 1600 800 300 500 1600
The dividend of 100 of post-acquisition profits is spilt between the parent (60) and minority interests (40). As it is paid in cash, no change is made to minority interests in the consolidated balance sheet. Consolidated Balance Sheet Assets Cash Inventory Investments Fixed Assets Goodwill Liabilities 198 Accounts payable 1400 300 Accruals Minority Interest 150 Share Capital 120 Retained Earnings 2168 1100 300 108 500 160 2168
Subsidiary Balance Sheet (before acquisition) Assets Cash Inventory Investments Fixed Assets Liabilities 20 Accounts payable 400 100 50 Shareholders Funds 570 300 270 570
P buys 100% of S for 270 Cash. Notes: Retained earnings= 178-18(dividend from pre-acquisition)= 160 All post acquisition profits paid as cash dividend 6. Intra-Group Asset Sales P sells a fixed asset to S for cash. Details of the asset are: Cost 20 Net Book Value at date of sale 5 Sale Price 12 Profit=7 (12-5) Parent Balance Sheet (after sale of asset and S purchase) Assets http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng Liabilities 18
Any profits or losses, on the sale of assets to other group members, must be cancelled out on consolidation.
Cash Inventory Investments S investment Fixed Assets 42 Accounts payable 1000 200 Accruals 270 Shareholders Funds 95 Profit on asset sale 1607 800 Fixed Assets 300 500 7 1607 Notes: Cash= 42+8=50 Inventory= 1000+400=1400 Investments= (470-270)+100=300 Fixed Assets= 95+62-7=150 Accounts Payable= 800+300=1100 ShareholdersFunds= (507-7)+(270-270)= 500 Funds 150 Profit 1900 0 1900
Notes: Cash= 300-270+12=42 Fixed Assets= 100-5=95 Subsidiary Balance Sheet (after purchase of asset) Assets Cash Inventory Investments Fixed Assets Liabilities 8 Accounts payable 400 100 62 Shareholders Funds 570 300
270 570
7. Vertically Integrated Groups Parent owns 70% of S1 S1 owns 60% of S2 P owns (60% of 70%) = 42% of S2, but since P controls S1 and it in turn controls S2, P effectively controls S2 and its results should be consolidated with P. So a subsidiary is consolidated if the parent holding is greater than 50%, or if the parent has effective control through a subsidiary. 19
Notes: Cash= 20-12=8 Fixed Assets= 50+12=62 Consolidated Balance Sheet Assets Cash Inventory Investments Liabilities 50 Accounts payable 1400 Accruals 300 Shareholders 1100 300 500
Example 7 Parent Balance Sheet(before acquisition) Assets Cash Inventory Investments Fixed Assets Liabilities 300 Accounts payable 1000 200 Accruals 100 Shareholders Funds 1600 800 300 500 1600 Assets Cash Inventory Investments Fixed Assets Liabilities 10 Accounts payable 300 80 30 Shareholders Funds 420 300
120 420
Parent buys 60% of Subsidiary 1 for 200, and pays cash.
Consolidated Balance Sheet - S1 Group Subsidiary 1 Balance Sheet (before acquisition) Assets Cash Inventory Investments Fixed Assets Liabilities 120 Accounts payable 400 100 50 Shareholders Funds 670 400 Assets Cash Inventory Investments Fixed Assets Goodwill Liabilities 30 Accounts payable 700 180 80 Minority Interest 16 Shareholders Funds 1006 700
270 670
36 270 1006
Subsidiary 1 buys 70% of Subsidiary 2 for 100, and pays cash. Subsidiary 2 Balance Sheet (before acquisition) http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Notes: Cash= (120-100)+10=30 Inventory= 400+300=700 20
Investments= 100+80=180 Fixed Assets= 50+30 = 80 Goodwill= 100 (70% of 120)=16 Accounts Payable= 400+300=700 Minority Interest = 30% of 120=36 Consolidated Balance Sheet - P Group Assets Cash Inventory Investments Fixed Assets Goodwill Liabilities 130 Accounts payable 1700 380 Accruals 180 Minority Interest 54 Shareholders Funds 2444 1500 300 144 500 2444 In practice, there are common adjustments that need to be made to eliminate inter-company income, expenses, profits, dividends etc. Also, retained profits must be split into pre- and post-acquisition, as in prior examples.
Notes: Cash= (300-200)+30=130 Inventory= 1000+700=1700 Investments= 200+180=380 Fixed Assets= 100+80 Goodwill= 38+16=54 200-(60%of 270)=38 Accounts= 800+700=1500 Minority Interest= (40% of 270)+36=144 8. Consolidated Income Statements In theory, the income statement of a 100% owned subsidiary can be added directly to the income statement of the parent to give a consolidated result. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 21
Example 8 In the following example, Intra Group transactions need to be eliminated. They are: Sales / Purchases 600 Distribution recharge/distribution cost 220 Finance recharge/finance cost 60 The impact of these adjustments is to reduce sales and cost of sales. Recharges at cost have no overall impact, unless the recharge and the cost appear on different lines in the financial statements. If a subsidiary is sold during the period, the consolidated income statements should only include the subsidiarys figures up to the date of disposal. Parent Company Income Statement DR Sales Cost of Sales Distribution Costs Administrative Expenses Finance Costs Profit before tax . http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 22 7500 1800 3200 1100 2400 16000 16000 CR 16000 2400 500 1000 800 300 5000 5000 880 880 60 60 220 Subsidiary Income Statement DR CR 5000 Adjustments Consolidated Income Statement DR CR 20400 600 220 9300 2300 4200 1900 2700 20400 20400
DR 600
CR
In the next example, the subsidiary was bought halfway through the accounting period. The subsidiarys accounts cover the entire period, so the adjustments represent the elimination of pre-acquisition profits. No inter-company sales, nor recharges, were made. Parent Company Income Statement DR Sales Cost of Sales Distribution Costs Administrative Expenses Finance Costs Profit before tax 7500 1800 3200 1100 2400 16000 16000 CR 16000 4300 800 1800 700 1400 9000 9000 4740 Subsidiary Income Statement DR CR 9000 Adjustments Consolidated (PreAcquisition) Income Statement DR 4740 2160 430 920 375 855 4740 9640 2170 4080 1425 2945 20260 20260 CR DR CR 20260
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9. Multiple Choice Questions 1) Not be included. 2) Include the subsidiarys figures up to the date of disposal. 3) Show pre-disposal and post-disposal results separately.
Choose the correct answer: 1. In the consolidated accounts, Profit on Intra Group Asset Sales: 1) Must be capitalised and depreciated over the life of the asset. 2) Must be shown separately. 3) Must be eliminated. 2. If a parent company has only a minority of an undertakings shares, but has effective control through a subsidiary, the correct consolidation of the undertaking treatment is: 1) Joint venture. 2) Associate. 3) Subsidiary. 3. The income statement of a 100% owned subsidiary can be added, without adjustment, to the income statement of the parent to give a consolidated result. This is, 1) Generally true. 2) Generally false. 4. Retained profits must be: 1) Analysed by subsidiary. 2) Split into pre- and post-acquisition profits. 5. If a subsidiary is sold during the period, the consolidated income statements should:
24
10. Exercise Questions Instructions: In each of the following examples complete the blank boxes with your own figures. 1. Intra Group Trading Company: Loan from parent Parent Balance Sheet (before acquisition) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 800 Accounts payable 600 Accruals 200 Shareholders Funds 100 Profit and loss Account 1700 800 400 500 The parent buys 100% of the subsidiary. It pays 400 cash. Then, the parent loans 200 to the subsidiary. Parent Balance Sheet (after acquisition & loan transaction) Assets Cash Accounts receivable Investments Investment in S Loan to subsidiary Fixed Assets Liabilities 200 Accounts payable 600 200 Accruals 400 200 100 Shareholders Funds 1700 800
400 500 1700
1700
Subsidiary Balance Sheet (after acquisition & loan transaction) Assets Cash Liabilities Accounts payable Loan from Parent Shareholders Funds Group Balance Sheet Assets Liabilities
25
Subsidiary Balance Sheet (before acquisition) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 20 Accounts payable 400 100 50 Shareholders Funds 570 170
Accounts receivable Investments Fixed Assets
400 570
Cash Accounts receivable Investments Fixed Assets Accounts payable Accruals Shareholders Funds Cash Accounts receivable Investments Fixed Assets 20 Accounts payable 400 100 50 Shareholders Funds 570 70
500 570
2. Intra Group Trading: Buying an asset (investment) Parent Balance Sheet (before acquisition) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 900 Accounts payable 400 200 Accruals 100 Shareholders Funds Profit and loss Account 1600 600 300 700
In this example, the subsidiary is 100% owned and cost 500 cash. The parent buys an investment security for 200 from a subsidiary that cost 90. So the subsidiary makes a profit of 110 but the group profit is zero as no group profit is made until the sale is made outside the group. No money has been transferred between the companies to settle this transaction at the balance sheet date.
1600
Subsidiary Balance Sheet (before acquisition) Assets Liabilities

26
Parent Balance Sheet (after acquisition and purchase transaction) Assets Cash Accounts receivable Investments Investment in Subsidiary Fixed Assets Liabilities 400 Accounts payable 400 400 Accruals 500 Subsidiary account 100 Shareholders Funds 1800 600 Assets Cash Accounts receivable Investments Fixed Assets Liabilities Accounts payable Accruals Shareholders Funds
300 200 700 1800
Subsidiary Balance Sheet (after acquisition and purchase) Assets Cash Accounts receivable Investments Parent account Fixed Assets Liabilities Accounts payable
Shareholders Funds Profit
Group Balance Sheet

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3. Intra Group Trading: Buying securities more than book value and sold outside the group at a profit. Parent Balance Sheet (before acquisition) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 900 Accounts payable 400 Accruals 200 Shareholders Funds 100 Profit and loss Account 1600 600 the securities to another company, outside the group, for 300 cash. Parent Balance Sheet (after acquisition and purchase) Assets Cash Accounts receivable Investments Investment in S Fixed Assets Liabilities Accounts payable Accruals Subsidiary a/c Shareholders Funds Retained Earnings
300 700 1600
Subsidiary Balance Sheet (after acquisition) Assets Cash Accounts receivable Investments Fixed Assets Liabilities Accounts payable
500 570
Shareholders Funds
The parent buys the subsidiary for 500. The parent buys securities from the subsidiary for 200 that cost 90. No cash is paid by the parent. Next the parent sold on
Group Balance Sheet

28
Assets Cash Accounts receivable Investments Fixed Assets Liabilities Accounts payable Accruals Shareholders Funds Retained Earnings Accounts receivable Investments Fixed Assets 400 100 Shareholders Funds 50 Retained profit 600 400 100 600
The parent buys 100% of the subsidiary for 500 and S pays a dividend of 40, all out of pre-acquisition profits. Subsidiary Balance Sheet (after dividend payment)
4. Dividends Paid by subsidiary from Pre-Acquisition Profits Parent Balance Sheet (before acquisition) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 600 Accounts payable 800 Accruals 200 Shareholders Funds 100 Retained Earnings 1700 800 100 300 500 1700
Assets Cash Accounts receivable Investments Fixed Assets
Liabilities 10 Accounts payable 400 100 Share Capital 50 Retained Earnings 560
100
400 60 560
Subsidiary Balance Sheet (before acquisition) Assets Cash Liabilities 50 Accounts payable 100
29
Parent Balance Sheet (after acquisition) Assets Cash Accounts receivable Investments Investment in S Fixed Assets Liabilities 100 Accounts payable 800 200 Accruals 500 Shareholders Funds 100 Retained Earnings 1700 800 Assets Cash Accounts receivable Investments Fixed Assets Liabilities Accounts payable Accruals Shareholders Funds Retained Earnings
100 300 500 1700
Parent Balance Sheet (after acquisition and receipt of dividend) Assets Cash Accounts receivable Investments Investment in S Fixed Assets Liabilities Accounts payable Accruals Shareholders Funds Retained Earnings
Dividends paid out of pre-acquisition profits are treated as income (eliminated by an impairment charge of the same amount, though they are a return of cash to the parent of part of the price paid and so reduce the cash outflow. Example 5 Dividends Paid by subsidiary from Post-Acquisition Profits The parent had bought 75% of the subsidiary for 700. The net assets of the subsidiary were worth 800 at the date of acquisition.
Parent Balance Sheet (after acquisition) Consolidated Balance Sheet

Assets
Liabilities
30
Cash Inventory Investments S investment Fixed Assets 0 Accounts payable 1000 Accruals 100 700 Share Capital 100 Retained Earnings 1900 800 300 750 50 1900 Cash Inventory Investments Fixed Assets Goodwill Accounts payable Accruals Minority Interest Share Capital Retained Earnings
Subsidiary Balance Sheet (after acquisition but before dividend) Assets Cash Inventory Investments Fixed Assets Liabilities 320 Accounts payable 400 100 Share Capital 680 Post-Acquisition profits 1500 400 800 300 1500
6. Intra-Group Asset Sales Parent Balance Sheet (before acquisition) Assets Cash Inventory Investments Fixed Assets Liabilities 300 Accounts payable 1000 200 Accruals 100 Shareholders Funds 1600 800 300 500 1600
A dividend of 200 is paid entirely out of post acquisition profits. The dividend is paid in cash and spilt between the parent (75%) and minority interests (25%). Post acquisition profits of 100 remain in the subsidiary, 75 attributable to the parent and 25% attributable to minority interests. Consolidated Balance Sheet Assets Liabilities
Subsidiary Balance Sheet (before acquisition) Assets Cash Liabilities 80 Accounts payable 320
31
Inventory Investments Fixed Assets 340 100 50 Shareholders Funds 570 Fixed Assets 250 570 Funds 150 Profit 1920 1920
Subsidiary Balance Sheet(after purchase of asset) Assets Cash Inventory Investments Fixed Assets Liabilities Accounts payable
The Parent buys 100% of S for 250 Cash. The parent then sells a fixed asset to S for cash. The asset cost the parent 30 and the Net Book Value at date of sale is10. The asset is sold for 25 giving a profit of 15 to P. Parent Balance Sheet (after sale of asset and S purchase) Assets Cash Inventory Investments S Investment Fixed Assets Liabilities Accounts payable Accruals Shareholders Funds Profit from sale
Consolidated Balance Sheet Assets Cash Inventory Investments Fixed Assets Liabilities Accounts payable Accruals Shareholders Funds Profit
Consolidated Balance Sheet Assets Cash Inventory Investments Liabilities 130 Accounts payable 1340 Accruals 300 Shareholders 1120 300 500
7. Vertical Integration and Minority Interest Parent Balance Sheet Assets Cash Inventory Liabilities 1000 Accounts payable 300 500
32
Investments Fixed Assets 200 Accruals 100 Shareholders Funds 1600 300 800 1600 Assets Cash Parent buys 75% of Subsidiary1 for 350 cash. Subsidiary 1 Balance Sheet Assets Cash Inventory Investments Fixed Assets Liabilities 400 Accounts payable 120 100 50 Shareholders Funds 670 270 Consolidated Balance Sheet - S1 Group 400 670 Assets Cash Inventory Investments Fixed Assets Goodwill Liabilities Accounts payable Minority Interest Shareholders Funds Inventory Investments Fixed Assets Subsidiary 1 buys 80% of Subsidiary 2 for 190, and pays cash. Subsidiary 2 Balance Sheet Liabilities 10 Accounts payable 300 80 30 Shareholders Funds 420 220
200 420
Consolidated Balance Sheet - P Group

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Assets Cash Inventory Investments Fixed Assets Goodwill Liabilities Accounts payable Accruals Minority Interest Shareholders Funds
34
8.Adjustments to the Income Statement Intra Group transactions need to be eliminated. Only transactions outside the group should be reflected in the consolidated statement. Group transactions are: 1. Sales by Parent to Subsidiary - 2000 on which the Parent made a profit of 500. The cost of sales was 1300 and distribution was 200. 2. Finance charges were incurred by the Parent on behalf of the Subsidiary of 200 Parent Company Income Statement DR CR Sales Cost of Sales Distribution Costs Administrative Expenses Finance Costs Profit before tax 7500 1800 3200 1100 2400 16000 16000 16000 2400 500 1000 800 300 5000 5000
Subsidiary Income Statement DR CR 5000
Adjustments Consolidated Income Statement DR CR
DR
CR
35
9. Acquisition part way through the accounting period The parent acquired the subsidiary halfway through the accounting period. The subsidiarys financial statements cover the entire period, so the adjustments represent the elimination of pre-acquisition profits. Assume that exactly half of the subsidiarys results occurred before the acquisition. No inter-company sales, nor recharges, were made.
Parent Company Subsidiary Income Statement DR CR Sales Cost of Sales Distribution Costs Administrative Expenses Finance Costs Profit before tax 7500 1800 3200 1100 2400 16000 16000 4300 800 1800 700 1400 16000 9000 9000 Income Statement DR CR 9000
Adjustments Consolidated (PreAcquisition) DR CR Income Statement DR CR
36
Solutions Answers to Multiple Choice Questions: 1. 3) 2. 3) 3. 2) 4. 2) 5. 2) 1. Intra Group Trading Company: Loan from parent Parent Balance Sheet (before acquisition) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 800 Accounts payable 600 Accruals 200 Shareholders Funds 100 Profit and loss Account 1700 800 400 500
Liabilities 20 Accounts payable 400 100 50 Shareholders Funds 570
170
400 570
The parent buys 100% of the subsidiary. It pays 400 cash. Then, the parent loans 200 to the subsidiary. Parent Balance Sheet (after acquisition & loan transaction) Assets Cash Accounts receivable Investments Investment in S Loan to subsidiary Fixed Assets Liabilities 200 Accounts payable 600 200 Accruals 400 200 100 Shareholders Funds 1700 800
400 500 1700
1700
Subsidiary Balance Sheet (before acquisition)
Subsidiary Balance Sheet (after acquisition & loan transaction)
Liabilities 220 Accounts payable 400 Loan from Parent 100 50 Shareholders Funds 770 Group Balance Sheet
170 200 400 770
Accounts receivable Investments Fixed Assets
400 Accruals 200 Shareholders Funds 100 Profit and loss 1600
300 700 0 1600
Liabilities 420 Accounts payable 1000 300 Accruals 150 Shareholders Funds 1870
970 400 500 1870
500 570
In this example, the subsidiary is 100% owned and cost 500 cash. The parent buys an investment security for 200 from a subsidiary that cost 90. So the subsidiary makes a profit of 110 but the group profit is zero as no group profit is made until the sale is made outside the group. No money has been transferred between the companies to settle this transaction at the balance sheet date. Parent Balance Sheet (after acquisition and purchase transaction) Assets Liabilities
Cash (P200+S220)=420 FA (P100+S50)=150
A/R (P600+S400)=1000 A/P (P800+S170)=970
Investments (P200+S100)=300
2. Intra Group Trading: Buying an asset (investment) Parent Balance Sheet (before acquisition) Assets Cash Liabilities 900 Accounts payable 600
Cash Accounts receivable Investments Investment in S Fixed Assets
400 Accounts payable 400 400 Accruals 500 Subsidiary account 100 Shareholders Funds 1800
600
Fixed Assets
150 Shareholders Funds 1670
700 1670
300 200 700 1800
Cash (P400+S20)=420 FA (P100+S50)=150
A/R (P400+S400)=800 A/P (P600+S70)=670
Investments (P400+S10-110)=300
Subsidiary Balance Sheet (after acquisition and purchase transaction) Assets Cash Accounts receivable Investments Parent account Fixed Assets Liabilities 20 Accounts payable 400 10 200 Shareholders Funds 50 Profit 680 Group Balance Sheet Assets Cash Accounts receivable Investments Liabilities 420 Accounts payable 800 300 Accruals 670 70
500 110 680
300
3. Intra Group Trading: Buying an asset (securities) It is bought for more than book value and sold outside the group at a profit. Parent Balance Sheet (before acquisition) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 900 Accounts payable 400 Accruals 200 Shareholders Funds 100 Retained Earnings 1600
For consolidation all inter company transactions must be eliminated. No profit is made until a sale is made outside the group. Parent Balance Sheet (after acquisition and purchase) Assets Cash Accounts receivable Investments Investment in S Fixed Assets Liabilities 400 Accounts payable 400 Accruals 400 Subsidiary a/c 500 Shareholders Funds 100 Retained Earnings 1800 600 0 200 300 700 1800
600
300 700 1600
Cash (900-500)= 400 Investments (200+200)= 400 Investments in S (0+500)= 500
500 570
The Parent buys 100% of the Subsidiary for cash of 500. The parent buys from a subsidiary, a security for 200 that cost 90. No settlement takes place. Next the parent sold on the investments to another client, outside the group, for 300 cash. The net profit to the group is 210 (300-90).
Subsidiary Balance Sheet (after acquisition and sale) Assets Liabilities
Cash Accounts receivable Parent a/c Investments Fixed Assets
20 Accounts payable 400 200 10 Shareholders Funds 50 Retained Earnings 680
70
Example 4 Dividends Paid by subsidiary from Pre-Acquisition Profits Parent Balance Sheet (before acquisition)
500 110 680
Liabilities 600 Accounts payable 800 Accruals 200 Shareholders Funds 100 Retained Earnings 1700
800 100 300 500 1700
Investments = 100-90 = 10 Retained earnings = 0+(200-90) = 110 Group Balance Sheet Assets Cash Accounts receivable Investments Fixed Assets Liabilities 720 Accounts payable 800 Accruals 210 Shareholders Funds 150 Retained Earnings 1880 670 0 300 910 1880
Subsidiary Balance Sheet (before acquisition) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 50 Accounts payable 400 100 Shareholders Funds 50 Retained profit 600 100 400 100 600
Cash (P400+S20+P300)=720 A/P (P600+S70)=670
A/R (P400+S400)=800
Investments (P400-P200+S10)=210 FA (P100+S50)=150 Retained earnings (P700+(P300-P200)+(S200-S90))=910
The parent buys 100% of the subsidiary for 500 and S pays a cash dividend of 40, all out of pre-acquisition profits.
Dividends paid out of pre-acquisition profits are treated as income though they are matched by an impairment charge. They reduce the cash cost of the investment in the Subsidiary. Parent Balance Sheet (after acquisition and receipt of dividend) Assets Cash Accounts receivable Investments Investment in S Fixed Assets Liabilities 140 Accounts payable 800 200 Accruals 460 Shareholders Funds 100 Retained Earnings 1700 800
Cash Accounts receivable Investments Fixed Assets
150 Accounts payable 1200 Accruals 300 Shareholders Funds 150 Retained Earnings 1800
900 100 300 500 1800
100 300 500 1700
Cash (P140+S10)=150 A/P (P800+S100)=900
A/R (P800+S400)=1200 SF 500.
Investments (P200+S100)=300 FA (P100+S50)=150
Subsidiary Balance Sheet (after dividend payment) Assets Cash Accounts receivable Investments Fixed Assets Liabilities 10 Accounts payable 400 100 Share Capital 50 Retained Earnings 560 Consolidated Balance Sheet Assets Liabilities 100
400 60 560
Example 5 Dividends Paid by subsidiary from Post-Acquisition Profits The parent has bought 75% of the subsidiary for 700. The net assets of the subsidiary were worth 800 at the date of acquisition. Parent Balance Sheet (after acquisition but before dividend) Assets Cash Inventory Investments S investment Fixed Assets Liabilities 0 Accounts payable 1000 Accruals 100 700 Share Capital 100 Retained Earnings 1900 800 300 750 50 1900
Post acquisition profits of 100 remain in the subsidiary, 75% attributable to the parent and 25% attributable to minority interests. Parent Balance Sheet (after acquisition, after dividend) Assets Cash Inventory Investments S investment Fixed Assets Liabilities 150 Accounts payable 1000 Accruals 100 700 Share Capital 100 Retained Earnings 2050 800 300 750 200 2050
Subsidiary Balance Sheet (after acquisition but before dividend) Assets Cash Inventory Investments Fixed Assets Liabilities 320 Accounts payable 400 100 Share Capital 680 Post-Acquisition profits 1500 400 800 300 1500
Subsidiary Balance Sheet (after acquisition, after dividend) Assets Cash Inventory Investments Fixed Assets Liabilities 120 Accounts payable 400 100 Share Capital 680 Post-Acquisition profits 1300 400 800 100 1300
A dividend of 200 is paid entirely out of post acquisition profits. The dividend is paid in cash and spilt between the parent (75%) and minority interests (25%). Consolidated Balance Sheet Assets Liabilities
Cash Inventory Investments Fixed Assets Goodwill
270 Accounts payable 1400 Accruals 200 Minority Interest 780 Share Capital 100 Retained Earnings 2750
1200 300 225 750 275 2750
Cash Inventory Investments Fixed Assets
300 Accounts payable 1000 200 Accruals 100 Shareholders Funds 1600
800 300 500 1600
Cash (P0+150)+S320-200)=270 The 200 is the dividend paid by S and 150 is received by P. Goodwill (75%x800)-700=100 Calculated from Cost 700 less 75% of the net assets of S. Minority Interest 25%(800+100)=225 Minority interest is 25% (Share capital + Retained Earnings- in this case, post acquisition profits ). Retained Earnings (P50+150)+(S75%x100)=275 Retained earning of P + only 75% of post acquisition profits of S.
Subsidiary Balance Sheet (before acquisition) Assets Cash Inventory Investments Fixed Assets Liabilities 80 Accounts payable 340 100 50 Shareholders Funds 570
320
250 570
The parent buys 100% of S for 250 Cash. The parent then sells a fixed asset to S for cash. The asset cost the parent 30 and the Net Book Value at date of sale is10. The asset is sold for 25 giving a profit of 15 to P. Parent Balance Sheet (after sale of asset and S purchase) Assets Liabilities
6. Asset Sales within the Group Parent Balance Sheet (before acquisition) Assets Liabilities
Cash Inventory Investments S Investment Fixed Assets
75 Accounts payable 1000 Accruals 250 200 Shareholders Funds 90 Profit from sale 1615
800 300 500 15 1615
Inventory Investments Fixed Assets
1340 Accruals 300 Shareholders Funds 150 Profit 1920
300 500 0 1920
Cash P75+S55=130 Fixed Assets P(100-10)+ S(75-15)=150 Inter company profit of 15 must be eliminated Profit There is no profit as far as the group is concerned. 7. Vertical Integration and Minority Interest Subsidiary 1 Balance Sheet
Subsidiary Balance Sheet(after purchase of asset) Assets Cash Inventory Investments Fixed Assets Liabilities 55 Accounts payable 340 100 75 Shareholders Funds 570 320
250 570
Assets Cash Inventory Investments Fixed Assets
Cash (80-25)Fixed Assets (50+25)=75
Liabilities 400 Accounts payable 120 100 50 Shareholders Funds 670
270
400 670
Subsidiary 1 buys 80% of Subsidiary 2 for 190, and pays cash. Subsidiary 2 Balance Sheet Consolidated Balance Sheet Assets Cash Liabilities 130 Accounts payable 1120 Assets Cash Inventory Liabilities 10 Accounts payable 300 220
Investments Fixed Assets
80 30 Shareholders Funds 420
200 420
Assets Cash Inventory Investments Fixed Assets Goodwill
Consolidated Balance Sheet - S1/S2 Group Assets Cash Inventory Investments Fixed Assets Goodwill Liabilities 220 Accounts payable 420 180 80 Minority Interest 10 Shareholders Funds 910 Parent Balance Sheet Assets Cash Inventory Investments Fixed Assets Liabilities 1000 Accounts payable 300 200 Accruals 100 Shareholders Funds 1600 500 300 800 1600 490
Liabilities 870 Accounts payable 720 380 Accruals 180 Minority Interest 60 Shareholders Funds 2210
990 300 120 800 2210
20 400 910
Cash P(1000-350)+S1/S2(220)=870 Goodwill P(350-300)+ S1/S2(10)=60 Minority Interest P(25% of 400)+S1/S2(20)=120
Parent buys 75% of Subsidiary 1 for 350 cash. The P group balance sheet is constructed by combining the P balance sheet with that of the S1/S2 group Consolidated Balance Sheet - P Group
8.Adjustments to the Income Statement Intra Group transactions need to be eliminated. Only transactions outside the group should be reflected in the consolidated statement. In this example the Parent owns 100% of Subsidiary Group transactions are: 3. 1. Sales by Parent to Subsidiary - 2000 on which the Parent made a profit of 500. The cost of sales was 1300 and distribution was 200. The goods are unsold by the subsidiary at the reporting date. 2. Finance charges were incurred by the Parent on behalf of the Subsidiary of 200. As there is no net effect to the group, no entry is made for these finance charges. In addition to the adjustments to the income statement, In the group balance sheet would require that the inventory value is reduced by 500 for unrealised profit. Required: Complete the Adjustment and Consolidated columns Parent Company Income Statement DR CR Sales Cost of Sales Distribution Costs Administrative Expenses Finance Costs Profit before tax 7500 1800 3200 1100 2400 16000 16000 16000 2400 500 1000 800 300 5000 5000 500 2000 2000
Subsidiary Income Statement DR CR 5000
Adjustments Consolidated Income Statement DR CR 19000 1300 200 8600 2100 4200 1900 2200 19000 19000 I
DR 2000
CR
9. Acquisition part way through the accounting period The parent acquired the subsidiary halfway through the accounting period. The subsidiarys financial statements cover the entire period, so the adjustments represent the elimination of pre-acquisition profits. No inter-company sales, nor recharges, were made. Required: Complete the Adjustment and Consolidated columns Parent Company Subsidiary Income Statement DR CR Sales Cost of Sales Distribution Costs Administrative Expenses Finance Costs Profit before tax 7500 1800 3200 1100 2400 16000 16000 4300 800 1800 700 1400 16000 9000 9000 Income Statement DR CR 9000 Adjustments Consolidated (PreAcquisition) DR CR 4500 2150 400 900 350 700 9650 2200 4100 1450 3100 Income Statement DR CR 20500 Note: Material from the following PricewaterhouseCoopers publications has been used in this workbook: -Applying IFRS -IFRS News -Accounting Solutions
4500 4500 20500 20500
48

IFRS Workbooks Consolidation Part2final

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CONSOLIDATION PART 2 2011

IFRS WORKBOOKS (1 million downloaded)

Ownership of 20-50% of the voting shares Representation on the Board of Directors

Subsidiary Dr 20 400 10 100 50 300 280 580 580 Cr

50 1400 300 150 1100 300

280 280 280 1900

300 100 500 1700

300 500 30 1930

Intra-group profits partly-owned subsidiaries and associates http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

300 500 100 1700

300 500 100 1700

800 300 500 100 1700

Notes Cash= 118+20=138 http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

Parent buys 60% of Subsidiary 1 for 200, and pays cash.

Notes: Cash= (120-100)+10=30 Inventory= 400+300=700 20

400 500 1700

Accounts receivable Investments Fixed Assets

Subsidiary Balance Sheet (before acquisition) Assets Liabilities

300 200 700 1800

Shareholders Funds Profit

Group Balance Sheet

300 700 1600

Group Balance Sheet

Assets Cash Accounts receivable Investments Fixed Assets

100 300 500 1700

Parent Balance Sheet (after acquisition) Consolidated Balance Sheet

Consolidated Balance Sheet - P Group

Subsidiary Income Statement DR CR 5000

Adjustments Consolidated Income Statement DR CR

Adjustments Consolidated (PreAcquisition) DR CR Income Statement DR CR

Assets Cash Accounts receivable Investments Fixed Assets

Liabilities 20 Accounts payable 400 100 50 Shareholders Funds 570

400 500 1700

Subsidiary Balance Sheet (before acquisition)

Subsidiary Balance Sheet (after acquisition & loan transaction)

Assets Cash Accounts receivable Investments Fixed Assets

170 200 400 770

Accounts receivable Investments Fixed Assets

300 700 0 1600

Assets Cash Accounts receivable Investments Fixed Assets

970 400 500 1870

Cash (P200+S220)=420 FA (P100+S50)=150

A/R (P600+S400)=1000 A/P (P800+S170)=970

Cash Accounts receivable Investments Investment in S Fixed Assets

150 Shareholders Funds 1670

300 200 700 1800

Cash (P400+S20)=420 FA (P100+S50)=150

A/R (P400+S400)=800 A/P (P600+S70)=670

500 110 680

300 700 1600

Cash (900-500)= 400 Investments (200+200)= 400 Investments in S (0+500)= 500

Subsidiary Balance Sheet (after acquisition and sale) Assets Liabilities

Cash Accounts receivable Parent a/c Investments Fixed Assets

20 Accounts payable 400 200 10 Shareholders Funds 50 Retained Earnings 680

500 110 680

Assets Cash Accounts receivable Investments Fixed Assets

800 100 300 500 1700

Cash (P400+S20+P300)=720 A/P (P600+S70)=670

Investments (P400-P200+S10)=210 FA (P100+S50)=150 Retained earnings (P700+(P300-P200)+(S200-S90))=910

Cash Accounts receivable Investments Fixed Assets

900 100 300 500 1800

100 300 500 1700