THE CONSOLIDATED STATEMENT OF FINANCIAL

POSITION

Approach to the consolidated statement of financial

position
Step 1 Read the question (requirement first) and draw up the group structure (W1),
highlighting useful information:
The % owned
Acquisition date
Pre-acquisition reserves.

Step 2 Draw up a proforma taking into account the group structure identified:
Leave out cost of investment
Put in lines for goodwill and non-controlling interest (will see in Sections 2 & 3).

Step 3 Work methodically down the statement of financial position, transferring

figures to proforma or workings:
Add P and 100% of S’s assets/liabilities line by line in brackets on face of
proforma, ready for adjustments
Investment in subsidiary to goodwill working
Reserves to consolidated reserves working(s)
Share capital & share premium (parent only) to face of answer
Open up a (blank) working for non-controlling interest (will see in Section 3).

Step 4 Read through the additional notes and attempt the adjustments showing
workings for all calculations (will see in Sections 4 & 5).
Do the double entry for the adjustments onto your proforma answer and onto your
group workings (where the group workings are affected by one side of the double
entry).
Examples:
Cancel any intragroup items e.g. current a/c balances, loans
Adjust for unrealised profits:
Unrealised profit on intragroup sales X
% held @ y/e %
= Provision for unrealised profit (PUP) X DR Retained earnings
(adjust in company selling goods) CR Group inventories
Make fair value adjustments:
– Fair value of land & buildings X
– Book value of land & buildings (X)
– Fair value adjustment X Post to goodwill working & add to PPE
Step 5 Complete goodwill calculation (will see in Section 2):
Fair value of consideration X
Fair value of non-controlling interest X
Less: Fair value of net assets at acquisition
– Share capital X
– Share premium X
– Retained earnings at acquisition X
– Other reserves at acquisition X
– Fair value adjustments at acquisition X
(X)
Goodwill at acquisition X
Step 6 Complete the consolidated retained earnings calculation:
Parent Subsidiary
Per question X X
Provision for unrealised profit (seller’s column) (X) (X)
Pre-acquisition retained earnings (X)
A
Group share of post acq'n ret'd earnings:
Subsidiary (A x %) X
X
Note: Other reserves are treated in a similar way.

Step 7 Complete the non-controlling interest calculation (will see in Section 3)

NCI at acquisition (from goodwill working) X
NCI share of post acq'n reserves (from reserves working x NCI %) X
X

Goodwill
In Chapter 23, the cost of the investment equalled the value of the identifiable net
assets acquired and accordingly, no surplus or deficit remained on cancellation.

Goodwill
Where the value of a business as a whole (cost of the investment + any non-
controlling share not purchased) is greater than the net assets acquired, the investor
controls (and has paid for) something more than the net assets of the acquired
business.
The difference is called goodwill and is measured at the acquisition date (under
IFRS 3 Business Combinations) as:
Goodwill
$
Fair value of consideration (investment) X
Fair value of non-controlling interest X
Less: Fair value of net assets at acquisition (X)
Goodwill at acquisition X
LECTURE EXAMPLE 1
Pogo acquired the entire share capital of Stick for $8m on 1 February 20X0 when the
statements of financial position of the two companies were as follows.
Pogo Stick
$'000 $'000
Investment in Stick 8,000 – –
Other assets 9,500 6,500
17,500 6,500

Share capital 9,000 3,000

Retained earnings 6,000 2,000
15,000 5,000
Liabilities 2,500 1,500
17,500 6,500
Required: Prepare the consolidated statement of financial position of the Pogo group
as at 1 February 20X0.

POGO GROUP SOFP AS AT 1 FEB 20X0

$ ‘000 $ ‘000
Goodwill (w2) 3,000
Other assets 9500 + 6500 16,000
19,000
EQUITY:
Share capital Parent only 9,000
Retained earnings (w3) 6,000 15,000
Liabilities 2500 + 1500 4,000
19,000
(w1) Group Structure:
Pogo
100% 1.2.x0 Pre-acquisition reserve $2,000,000
Stick

(w2)
 FV of consideration In question 8,000
FV of non-controlling interest 0
Total value of investment at acquisition 8,000
- FV of Net assets at acquisition:
Share capital – Stick 3,000
Retained earnings - Stick 2,000 5,000
GOODWILL ARISING ON ACQUISITION 3,000

(w3) Retained earnings

POGO STICK
Per question 6,000 2,000
- Pre acquisition reserves (2,000)
0
Group share 100% x 0 0
6,000

Points to note
(a) Add P and 100% of S’s net assets line by line to show control
(b) In the equity section, include a new heading for ‘non-controlling interest’ to
show the extent to which the assets and liabilities are controlled by the parent, but
are owned by other parties, namely the non-controlling interest.

Measurement of non-controlling interest at acquisition

For the purposes of the exam, non-controlling interest at the acquisition date is to be
measured at fair value (i.e. how much it would cost of the acquirer to acquire the
remaining shares).
 If not given in a question, the fair value of non-controlling interest (NCI) can be
calculated as the number of shares belonging to NCI multiplied by the
share price.

The fair value of non-controlling interest (NCI) at acquisition is effectively the NCI
share of the subsidiary’s net assets and goodwill at the acquisition date.

Measurement of non-controlling interest at the year end

The subsidiary’s net assets (or equity) will increase as the subsidiary’s reserves
increase.
Therefore, to update NCI to its year end value, the NCI share of post-acquisition
reserves needs to be added to the NCI at acquisition.

Proforma for non-controlling interest working

NCI at acquisition [at fair value] (from goodwill working) X
NCI share of post-acquisition reserves
[(year-end reserves – pre-acquisition reserves]* x NCI %) X
NCI at year end (i.e. NCI share of year end net assets & goodwill) X
* from reserves working
LECTURE EXAMPLE 2
Pop acquired 75% of the issued share capital of Snap on 1 January 20X8 when
Snap had a retained earnings balance of $1m. The fair value of the non-controlling
interest at that date was $1.5m. One year later the two companies had the following
statements of financial position.
Pop Snap
$'000 $'000
Investment in Snap 6,000 –
Other assets 10,500 9,200
16,500 9,200

Share capital 10,000 4,000

Retained earnings 1,500 2,200
11,500 6,200
Liabilities 5,000 3,000
16,500 9,200
Required: Produce the consolidated statement of financial position of Pop and
its subsidiary as at 31 December 20X8.

POP GROUP SOFP AS AT 1 JAN 20X8

$ ‘000 $ ‘000
Goodwill (w2) 2,500
Other assets 10500 + 9200 19,700
22,200
EQUITY:
Share capital Parent only 10,000
Retained earnings (w3) Pop + Snap 2,400
Non-controlling interest (w4) Snap 1,800 14,200

Liabilities 5000 + 3000 8,000

22,200

(w1) Group Structure:

Pop
 75% 1.1.x8 Pre acquisition reserve $1,000,000
25% NCI
Snap

(w2)
FV of consideration – investment In question 6,000
(investment)
FV of non-controlling interest From question 1,500
Total value of investment at acquisition 7,500
- FV of Net assets at acquisition:
Share capital 4,000
Retained earnings (note) 1,000 (5,000)
GOODWILL ARISING ON ACQUISITION 2,500

Note: Remember the retained earnings HAS TO BE the value BEFORE Pop
purchased Snap, i.e. in the notes above = $1m.
The $2,200 is how much retained earnings Snap has made since Pop acquired
them.

(w3) Retained earnings

POP SNAP
Per question 1,500 2,200
- Pre acquisition reserves (1,000)
Post-acquisition reserves 1,200
Group share 75% x 1200 900
2,400

(w4) NCI
FV NCI @ acquisition In question 1,500
NCI share of post-acquisition reserves 25% x 1200 300
NCI @ year end 1,800

Points to note
(a) The assets and liabilities sections of the statement of financial position show what
the group CONTROLS.
(b) The equity section of the statement of financial position shows who actually
OWNS the consolidated net assets of the group.

Other reserves
Exam questions may give other reserves (such as a revaluation surplus) as well as
retained earnings. These reserves should be treated in exactly the same way as
retained earnings, which we have already seen.
 If the reserve is pre-acquisition it forms part of the calculation of net assets
at the date of acquisition and is therefore used in the goodwill calculation.
 If the reserve is post-acquisition or there has been some movement on a
reserve existing at acquisition, the consolidated statement of financial position
 will show the parent's reserve plus its share of the movement on the
subsidiary's reserve.

Fair values
We calculate goodwill as:
Goodwill $
Fair value of consideration (investment) X
Fair value of non-controlling interest X
Less: Fair value of net assets at acquisition (X)
Goodwill at acquisition X

Fair value of net assets acquired

Assets and liabilities in an entity's own financial statements are often not stated
at their fair value, e.g. where the entity's accounting policy is to use the cost model
for assets. If the subsidiary's financial statements are not adjusted to their fair values,
where, for example, an asset's value has risen since purchase, goodwill would be
overstated (as it would include the increase in value of the asset).

Under IFRS 3 the net assets acquired are therefore required to be brought into the
consolidated financial statements at their fair value rather than their book value.
The difference between fair values and book values is a consolidation adjustment
made only for the purposes of the consolidated financial statements.

Fair value of consideration

The consideration transferred (which is the same as the figure recorded as the cost
of the investment in the parent's separate financial statements) is also measured at
fair value.
For the purposes of the exam, the consideration could consist of cash or
shares.
 The fair value of cash is simply the amount of cash paid.
 The fair value of shares is the quoted share price at the acquisition date.

Fair value of non-controlling interest

For the purposes of the exam, non-controlling interest at the acquisition date is to be
measured at fair value (i.e. how much it would cost of the acquirer to acquire the
remaining shares).

LECTURE EXAMPLE 3
X acquired 300,000 of Y’s 400,000 $1 ordinary shares on 1 January 20X5 when Y’s
retained earnings were $500,000. The fair value of the non-controlling interest in Y at
that date was $280,000.
The purchase consideration comprised:
$250,000 in cash payable at acquisition
New shares issued in X on a 1 for 3 basis.
The quoted price of X’s shares on the acquisition date was $7.35.

The fair value of Y’s land and buildings at 1 January 20X5 was $160,000 but the
book value was only $100,000. All other net assets had a fair value equivalent to
their book value.
Required: Calculate the goodwill arising on acquisition of Y.

FV of consideration: (w)
Cash 250,000
Shares 300,000 shs / 3 = 735,000
100,000 shs x $7.35
Total consideration 985,000
FV of non-controlling interest 280,000
Total value of invsmt @ acq 1,265,000
FV of Net assets @ acquisition:
Share capital - Y 400,000
Retained earnings - Y 500,000
FV adjustment for land & build 160,000 – 100,000 60,000 (960,000)
GOODWILL ON ACQUISITION 305,000

Inter-company trading
IFRS 10 Consolidated Financial Statements requires inter-company balances,
transactions, income and expenses to be eliminated in full.
The purpose of consolidation is to present the parent and its subsidiaries as if they
are trading as one entity.
Therefore, only amounts owing to or from outside the group should be included in
the statement of financial position, and any assets should be stated at cost to the
group.

Inter-company balances
Trading transactions will normally be recorded via a current account between the
trading companies, which would also keep a track of amounts received and/or paid.
The current account receivable in one company's books should equal the current
account payable in the other.
 These two balances should be cancelled on consolidation as intercompany
receivables and payables should not be shown.
The double entry required is:
– DR (↓) Inter-company payable
– CR (↓) Inter-company receivable
There are 2 issues here:
 In the consolidated accounts, we treat the group as a single entity. In
substance, P has made profit from selling goods to itself (as the goods are
still in inventory at the year-end). This unrealised profit must be eliminated.
 Inventories should be valued at the lower of cost and NRV to the group.
Inventories are currently in S’s books at $120 but they cost the group (to buy
from the 3rd party supplier) $100. So inventories are overvalued by $20.

Adjustment for unrealised profit

The double entry for closing inventories is:
DR Inventories (SOFP) CR Cost of sales (SPLOCI)
Therefore, as closing inventories have been overvalued, the double entry to
remove the unrealised profit is simply the opposite:

DR Cost of sales (SPLOCI)

(increasing expenses & reducing profit, eliminating the unrealised profit)

CR Inventories (SOFP)

When preparing a consolidated SOFP, the debit to cost of sales must feed through
to retained earnings. Therefore, the adjustment required to eliminate the unrealised
profit in the consolidated SOFP is:
DR (↓) Retained earnings of the seller
CR (↓) Consolidated inventories

Note that this adjustment only applies to goods from inter-company trading
still left in inventories at the year end.

Method for unrealised profit

Calculate the unrealised profit included in inventories and mark the adjustments by
reducing inventories on your proforma answer and by reducing the seller’s retained
earnings in the retained earnings working.

LECTURE EXAMPLE 4
Poach acquired 60% of the share capital of Steal on its incorporation. The
statements of financial position of the two companies as at 31 December 20X8 are
as follows.
Poach Steal
$'000 $'000
Non-current assets
Property, plant and equipment 200 50
Investment in Steal 6
206 50
Current assets
Inventories 22 18
Receivables – from Poach – 30
– other 96 29
Cash 4 15
122 92
328 142

Equity
Share capital 100 10
Retained earnings 147 73
247 83
Current liabilities
Trade payables – to Steal 30 –
– other 51 59
81 59
328 142
Notes
(i) The fair value of the non-controlling interest in Steal at acquisition was $4,000.
(ii) Steal sells goods to Poach at a profit margin of 25% on selling price. At the year
end, $12,000 of the goods that Poach had purchased from Steal remained in
inventories.
Required: Prepare a consolidated statement of financial position as at 31
December 20X8.

POACH GROUP SOFP AS AT 31 DEC 20X8

$ ‘000 $ ‘000
NCA: PPE 200 + 50 250
CA: Inventory 22 + 18 – 3 (W4) 37
Receivables: Poach 30-30 0
Receivables: Other 96 + 29 125
Cash 4 + 15 19 181
TOTAL ASSETS 431
EQUITY
Share capital Parent only 100
Retained earnings (w2) 189
 289
Non-controlling interest (w3) 32
321
CL: Payables – Steal 30-30 0
Payables – other 51 + 59 110 110
431
* for Inter-company receivables and payables we need to the opposite entries that is
DR a payable (a CR account) and CR a receivable (a DR account).

(w1) Group Structure:

Poach

60% Pre acquisition reserve $0, no goodwill either

NCI Share = 40%
Steal

(w2) Retained earnings

POACH STEAL
Per question 147 73
- Pre acquisition reserves 0
- Provision for unrealized profit (PUP) (w4) (3)
70
Group share of post-acquisition reserves 60% x 70 42
189
*** A DR to the retained earnings means you are subtracting because retained
earnings is always a CR account.

(w3) NCI
NCI @ acquisition Note I 4
NCI share of post-acquisition reserves 40% x 70 28
32
(w4) PUP
Eliminate the profit element in inventories, remember the value of the goods
mentioned in the question is the selling price of the goods NOT THE cost.

Profit in inventories:
Sales 100% 12,000
COS 75%
Gross profit 25% 12000 X 25/100

Profit element = 25% X 12,000 = $3,000

DR: Retained earnings of seller (steal)

CR: Consolidated inventories
A CR to inventories means we are subtracting from the inventory figure because
inventories is always a DR account.

Mid-year acquisitions
So far, we have considered acquisitions only at the end of the reporting period. Thus,
since companies produce statements of financial position at that date anyway, there
has been no special need to establish the net assets of the acquired company at that
date. With a mid-year acquisition, a statement of financial position is unlikely to exist
at the date of acquisition as required. Accordingly, we have to estimate the net
assets at the date of acquisition using various assumptions.

Rule for mid-year acquisitions

Assume that profits accrue evenly throughout the year unless specifically told
otherwise.

LECTURE EXAMPLE 5
Pat acquired 80% of the issued share capital of Slap on 30 September 20X7. The
share price for each of the non-controlling interest shares in Slap was $4.50 at the
acquisition date.
At the year-end 31 December 20X7 the two companies have the following
statements of financial position:
Pat Slap
$'000 $'000 $'000 $'000
Investment in Slap 4,000 –
Other assets 10,500 6,000
14,500 6,000

Share capital ($1 shares) 6,000 1,000

Share premium – 500
Retained earnings
1 Jan 20X7 4,000 1,500
Profit for 20X7 2,000 1,000
6,000 2,500
12,000 4,000
Liabilities 2,500 2,000
14,500 6,000
Required: Calculate the goodwill at the date of acquisition.

FV of consideration 4,000
FV of non-controlling interest $4.50 x 200 900
Total value of invsmt @ acq 4,900
FV of NA @ acquisition:
Share capital Slap SOFP 1,000
Share premium Slap SOFP 500
Retained earnings (w2) 2,250 (3,750)

GOODWILL ON ACQUISITION 1,150

(w1) Group Structure:

Pat

80% 30.9.x7 Pre-acquisition reserve $2,250

NCI 20%
Slap

No. of shares in Slap is $1,000 / $1 = 1,000,000 shares

NCI shares = 20% x 1,000,000 shares = 200,000 shares

(w2) retained earnings

SLAP
Per question @ 1.1.x7 1,500
Profit for 9 months to 30.9.x7 (PRE) 1000 x 9/12 750
Retained earnings as at 30.9.x7 2,250

LECTURE EXAMPLE 6
On 1 January 20X1, Reprise Co purchased 80% of Encore Co for $2,400,000. The
retained earnings at that date were $1,700,000.
The following draft statements of financial position for the two companies have been
prepared as at 31 December 20X7 are as follows:

Reprise Encore
$'000 $'000
Investment in Encore 2,400 0
Other assets 6,820 3,470
Total assets 9,220 3,470

Equity
Share capital - $1 ordinary shares 1,000 500
Retained earnings 6,720 2,600
7,720 3,100
Liabilities 2,500 370
9,220 3,470

The non-controlling interest (NCI) was valued at $600,000 as at 1 January 20X1.

TASK 1
Value of investment at acquisition $’000
Investment in Encore held by Reprise
NCI @ acquisition
Total value of investment @ acquisition

Fair Value of Encore’s net assets at acquisition $’000

Equity share capital
Retained earnings
Total fair value of Encore’s net assets at acquisition
Goodwill of acquisition expressed as a formula

TASK 2
1.
2.
3.

TASK 3
FV of NCI at acquisition + 20% of post-acquisition retained earnings

TASK 4
1. Investment $0 (Remember investment doesn’t go in the SOFP)
2. Other assets $
3. Share capital $
4. Retained earnings $
5. Liabilities $

(w) Retained earnings Reprise Encore

Per question
Pre-acquisition

Group share of post

Acquisition