Consolidated Financial

Statements
Working 1: Group Structure
Parent
40%

100%
80%
Associate

ABC
Company XYZ
Company
Consolidated Statement of Financial Position

Working 2: Net Assets of subsidiary

• Net Assets of subsidiary at acquisition date and reporting date,
if they meet definition of assets/liability.
• Net assets in balance sheets is book value given
• If any asset value increases, fair value adjustment to be given
in assets value and depreciation value
• No intangibles assets (goodwill) of subsidiary would be
considered except patents, licenses, trademarks, brand name
with estimated fair value. Separable assets
• Difference of NA at acquisition date and reporting date is post-
acquisition profit.
 Example-1: Net Assets of Subsidiary
•Statement of financial position of Madrid showed equity share capital of CU3m and
retained earnings of CU 3.25m. Included in this total is:
•Freehold land with a book value of CU 0.4m but a market value of cu 0.95m
•Machinery with book value of cu 1.2m. No reliable market value exists for these
items. They would costs 1.5m to replace as new. The machinery has an expected life
of 10 years and Madrid’s machines are 4 years old
•The fair value of all other assets and liabilities is approximately equal to their book
value
•Brand name was internally generated and so is not recognized in their statement of
financial position. Valuation experts have estimated its fair value to be 0.5M.
•Parent Company intend to close down one of the divisions of Madrid and wish to
provide for operating losses up to the date of closure which are forecast as 0.75m
•An investment in plant and machinery will be required to bring the remaining
production line of Madrid up to date. This will amount to $405,000 in the next 12
months.
•Assume discount rate of 10%
 Working 3: Goodwill
Fair value of consideration xxxxx
Plus: Non- Controlling interest xxxxx
(Net Assets at acquisition x NC shares %)
Less: Fair value of Net assets of subsidiary xxx
= Good at acquisition xxxxxx
Impairment to date (xxxxx)
Goodwill at reporting date
 Working 3: Goodwill
Fair value of consideration transferred
1. Shares in parent company (market value)
2. Debentures or notes
3. Cash
4. Deferred consideration (discounted value)
5. Contingent consideration (discounted value
times probability )
 Example 2: Fair value of consideration transferred
Malawi has acquired 80% of the shares in Blantyre. The consideration
consisted of:
1. Cash 25,460
2. Malawi issued 10,000 shares to the shareholders of Blantyre, each
with a nominal value of tk.1 and market value of tk.4
3. Cash of Tk.20,000 to be paid one year after the date of acquisition
4. Cash of tk.100,000 may be paid one year after the date of acquisition,
if Blantyre achieves a certain profit target. It is thought that there is
only a 40% chance that this will occur.
5. Legal expenses associated with the acquisition amounted to Tk.15000.
6. A discount rate of 10% should be used.

Required: Calculate the fair value of consideration transferred.

 Example 3: Fair value of consideration transferred
Kelly Ltd acquired 75% of Eclipse Ltd on 1 July, 2007. This consideration
comprised:
5 million 25p ordinary shares of Kelly Ltd (Market value 60p) to be issued
on 2007 (issue costs of Tk. 10,000 were paid to a merchant bank)
Tk 1 million cash payable on 01 July 2007
A further 1 million 25p ordinary shares of Kelly Ltd to be issued on 01 July
2008
The fair value of the identifiable assets and liabilities recognized by
Eclipse Ltd at 1 July 2007 is Tk. 3.628m. The financial statements of
Eclipse Ltd have for some years disclosed a contingent liability with a
potential amount of Tk.2 million. The fair value of this contingent liability
at 01 July 2007 has been reliably estimated at tk,200,000.

Calculate fair value of consideration transferred and goodwill

 Solution to Example 3
Solution
Ordinary shares issued (5mX0.6) = 3m
Ordinary shares to be issued ( 1m X 0.60) = 0.60m
Cash 1 m
Fair value of consideration transferred = 4.60m

Net assets of the subsidiary = 3.628m – 0.20m

= 3.428
Good will
Fair value of consideration transferred = 4.6
Plus: non-controlling interest = 0.857 (3.428x .25)
= 5.457m
Net assets of subsidiary = (3.428)
Goodwill = 2.029m
Investment in malay shares – dr 3.00 m
Share capital credit (.25X5m) cr 1.25 m
Share premium credit (.35x5m-0.010m = 1.74m
Bank a/c (issue costs) 0.01m
 Working 4: Non-controlling interest
NCI can be measured at any of the two
methods:
1. Proportionate fair value of net assets
acquired
2. Fair value of NCI itself

It case of second option, a part of goodwill is

attributed to NCI
 Example 4: NCI
The consideration transferred by National Ltd when it
acquired 8,00,000 of 1,000,000 CU1 shares of Locale Ltd
was CU25million. At the acquisition date Locale’s Ltd
retained earnings were CU 20million and the fair value
of the 2,00,000 shares in Locale Ltd not acquired was
CU 5million.
Required: calculate the goodwill acquired in the
business combination on the basis that the NCI in
Locale Ltd is measured by using:
(a) Proportionate basis
(b) Fair Value
 Solution to Example -4
Method 1: Proportionate basis
Consideration transferred -----25.0m
NCI ( 21mx20%) 4.2 m
Less: Net Assets acquired – (21.0m)
Goodwill 8.2m

Method 2
Consideration transferred -----25.0m
NCI ( 21mx20%) 5,0 m
Less: Net Assets acquired – (21.0m)
Goodwill 9.0m
 Subsequent measurement of NCI
Fair value of NCI at acquisition date--------
Plus: share of post acquisition profit
Less: Impairment of Goodwill
 Working 5: Group Retained Earnings
Parent’s retained earnings (single statement)
Plus: share of post acquisition profit
Less: PURP
Less: Goodwill impairment
Add: Bargain Purchase
 Intra-group balances
• Group account reflects transaction with third
party only
• The effects of transaction between group
members should be cancelled out/eliminated
• This is application of single entity concept
• Trade Debtors/ Loans/ debentures/
redeemable preference shares should be
cancelled out from both companies.
Intra- group trade receivables and payables

Step 1: check that current account agree before

cancelling. They may not agree if goods or cash
are in transit at the year end
Step 2: Make balances agree by adjusting for in
transit items in the receiving company’s books
Step 3: cancel intra-group balances
 Unrealized intra-group profit
For total sales
Sales a/c ----dr
Cost of goods sold ---cr

For unrealized profit

Seller’s retained earnings ---dr
Inventory Credit
 Non-current assets transfer
Adjustment
Carrying amount of NCA at year end in the transferee's
financial statements
Less: carrying amount of NCA at year end if transfer had
not been made
Unrealized profit----------------------------
Adjustment for unrealized profit
Selling company's retained earnings ----dr
NCA carrying amount in consolidated financial staements
 Example 6: Non current assets transfer

P Ltd owns 80% of S ltd. P Ltd transferred a non-

current assets at a value of CU15000 on 01
January 2007. the original cost to P Ltd was CU
20,000 and the accumulated depreciation at the
date of transfer was CU 8000. the asset had, still
has, a total useful life of five years.
Required: Show the assets in the consolidated
statement of financial positions
 Reflecting fair values
Identifiable assets and liabilities of a subsidiary
should be brought into consolidated financial
statement as fair value. Normally these fair
value are not reflected in the single financial
statements. Depreciation/amortization will be
adjusted also based on fair values.
Goodwill of subsidiary will not be considered as
net assets and hence will be deducted from
Retained earnings of subsidiary.
 Other consolidated adjustments
• Other reserves in a subsidiary at acquisition
should form the part of net assets
• The group share of any post acquisition
movement in other reserves should be
recognized in the consolidated statement of
financial positions
 Accounting policy alignment
On consolidation uniform accounting policies should
be applied for all amounts. This is another
consequence of the single entity concept.
If the parent company and subsidiary company have
different accounting policies the balances in the
subsidiaries financial statements should be adjusted
to reflect the accounting policies of parent company.
This adjustments are made in net assets working
note.
 Example-6: Accounting policy alignment

William ltd has been 85% owned by Mary Ltd for

some years. On January 1, 2014 William ltd
acquired an item of plant for CU 40000. William
Ltd depreciates this item at 15% on reducing
balance basis, while Mary Ltd policy for this class
of plant is 10% per annum on straight line basis.
Set out the adjustment required for this assets in
consolidated financial statements as on
December 31, 2005
 Consolidated statement of Profit & Loss
Account
Basic Principle
1. Shows income generated from the net assets
under the parent company’s control
2. The single entity concept is applied- the effects
on transactions between group members are
eliminated on consolidation
3. The ownership of profits is shared between
owners of the parent and any non-controlling
interest
 Intra-group transactions and unrealized
profit
Intra-group sales means sales between parent
and subsidiary and subsidiary and subsidiary
Step 1: add across P and S revenue and P and S
cost of sales
Step 2: Deduct value of intra-group sales from
revenue and cost of sales
 Unrealized profit on trading
• If any items sold by one group company to another
are included in inventories (have not been sold to
outside parties), their value must be adjusted to the
lower of cost and NRV.
• Provision is set up by increasing cost of sales by the
amount of the unrealized profit
• The provision should always be set against the selling
company’s profit. As a result, where seller is
subsidiary not wholly owned, the provision reduces
the profit for the year for NCI calculation
 Non-current assets transfer
1. Eliminate the profit and loss on transfer and
depreciation in full
2. The profit and loss is eliminated against the
seller. This automatically affects the non-
controlling interest where S is the seller
3. Depreciation is adjusted against the seller
even though the purchased recorded it.
Example-6: Non-current assets transfer

P Ltd owns 80% of S Ltd. P ltd transferred to S Ltd

a non-current assets at a value of Tk. 15,000 on
Jan 01, 2007. The original cost to P Ltd was Tk.
20000 and accumulated depreciation at the date
of transfer was Tk.8000. The asset has a total
useful life of five years, which is unchanged.
Prepare the adjusting entry in consolidated
statement of financial position on Dec 31, 2007.
 Dividends
• Intra-group dividends should be cancelled on consolidation
• The un-cancelled amount should be disclosed in the
consolidated statement of changes in equity
• Dividends received are shown as income in the statement of
profit and loss but dividends paid are shown in statement of
changes in equity
• Cancelling P’s dividend income from S in P’s statement of
profit and loss and S’s statement of changes in equity
• Leaving the portion of dividend received or to be received by
non-controlling shareholders in the statement of changes in
equity
 Other adjustments
Redeemable and some irredeemable preference shares
Finance income received from subsidiary in parent’s
book is cancelled against the amount paid and payable
in subsidiary’s books, leaving the portion of third party
as a finance costs
Interest and management charges
Interest or management charges paid/ payable in the
statement of profit and loss of the subsidiary (expense)
should be cancelled against the interest or management
charges (income) of parent company
 Mid-Year Acquisition
The results of the subsidiary should be
consolidated from the date of acquisition
The profit and loss amounts of the subsidiary
should be time apportioned