International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning.
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International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Part three
Consolidated accounts and the multinational
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Structure of part three
• Chapter 25: Introduction to consolidated financial statements
• Chapter 26: IFRSs and preparation of consolidated financial statements
• Chapter 27: Alternative methods of preparing consolidated financial statements
• Chapter 28: Accounting for associates, joint ventures, special purpose entities and related party transactions
• Chapter 29: Foreign currency translation
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Chapter 25
Introduction to consolidated financial statements
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Contents
• Control in groups• Need for group accounts• Goodwill in group accounts• Preparation of simple consolidated statements of financial position• Preparation of more complex consolidated statements of financial position• Preparation of consolidated statement of income
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Learning objectives
• Outline the need for consolidated financial statements
• Explain a business combination
• Consider the mechanics of preparing consolidated financial statements
• Prepare consolidated statements of income for combinations of more than one subsidiary
• Prepare consolidated statements of financial position for more than one subsidiary
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Different types of business combinations
• A new company may be formed in order to absorb one or more existing companies. The essential feature here is that the new company would physically take over the assets and liabilities of the companies absorbed and the latter would then cease to exist.
• A company may be taken over by another company, but in this case the company being taken over would continue to exist (and would still, of course, keep its own assets and liabilities).
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.1
• Company A, an engineering firm, owns buildings and plant and machinery with NBV of $500 000. Company B buys these assets on 1 January 200X from A at a cost of $650 000 and leases them back to A on an operating lease.
• Company C, on the 1 January 200X purchases 55% of the ordinary voting shares of Company A on the open market.
• Which company, B or C, has control of A?
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Control
• Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities
• A parent is an entity that has one or more subsidiaries
• A subsidiary is an entity controlled by another entity
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Group structure examples
B subsidiary of A S1 is not a subsidiary of H
S, S1 and S2 all subsidiaries of H S1 is not a subsidiary of H
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Minority interest or non-controlling interest
• Minority interest is that part of the subsidiary that the holding (parent) entity does not own.
• Or ; is that portion of the profit or loss and the net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Need for group accounts
• To provide useful information to shareholders and other users of the holding enterprise’s financial statements about the group as a whole
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Goodwill
• Goodwill is the difference between the revalued net assets and the investment (price paid at acquisition) of the parent
• Goodwill can be considered as a premium on acquisition
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Negative goodwill
• Negative goodwill occurs when the investment (price paid at acquisition) of the parent is higher than the revalued net assets of the company
• Might occur when companies with e.g. recent history of losses are bought• Discount on acquisition
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Preparation of simple consolidated statements of
financial position
• Statement of financial position at date of acquisition• Consolidated statement of financial position later than date of acquisition• Subsequent adjustments to purchase price• Inter-company trading and the elimination of unrealised profits• Reconciliation of inter-company balances• Consistency of reporting dates and accounting policies within the group
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Example 25.1 the statements of financial position of H and S as
at 31 December 200X
H in € S in €
Tangible non-current assets
140 000 45 000
Investment in S 75 000
Net current assets 20 000 15 000
Total 235 000 60 000
Share capital 150 000 50 000
Reserves 85 000 10 000
Total 235 000 60 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Example 25.1 (cont’d)
• H acquired the whole of the share capital of S for cash on 31 December 200X. The fair value of S’s net assets at this date were € 67 000. Prepare the consolidated statement of financial position of H group as at 31 December 200X. To do this consolidation there are several steps:
• 1. calculate goodwill• 2. revaluate the net assets of the subsidiary S to fair value• 3. Consolidate H and S
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
GOODWILL
• Fair value of purchase price 75 000• Fair value of 100% net assets acquired 67 000• Goodwill 8 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Revalued Statement of financial position
• Net assets 67 000• Share capital 50 000• Reserves 10 000• Revaluation reserve 7 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Group consolidated statement of financial
position
• Net assets (140 000+ 20 000+ 67 000) 227 000• Goodwill on acquisition 8 000
235 000• Share capital 150 000• Reserves 85 000
235 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Example 25.2: A bought 75% of S at 31 December 200X at 72 000 (=equal to the fair value of
the net assets
A in € at 31.12.200X B in € at 31.12.200X
Net assets 403 000 87 000
Investment in B 72 000
475 000 87 000
Share capital 350 000 60 000
reserves 125 000 27 000
475 000 87 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Goodwill calculation
Cost of control Non-controlled interest
Fair value of purchase price
72 000
Purchased 75% of shares 60 000
45 000 35% x 60 000 15 000
Plus 75% reserves at acquisition 27 000
20 250 25% x 27 000 6 750
65 250 21 750
goodwill 6 750
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Consolidated statement of financial psoition for A group as
at 31 December 200X
Net assets 490 000
goodwill 6 750
496 750
Share capital (only A even though ownership not 100%)
350 000
Reserves (only A) 125 000
475 000
Non-controlling interest 25% x 87 000 21 750
496 750
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Consolidated statement of financial position later than the
date of acquisition
• All reserves prior to acquisition belonging to the subsidiary are taken to the cost of control or belong to the non-controlling interest.
• We can only include the parent share of the reserves post acquisition in the consolidation
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.5
• The statements of financial position of H and S at the date H acquired 1 million 10p shares of S at a fair value of £ 120 000 for cash (the transaction has not yet been entered in H’s accounts). The fair value of S’s net assets at the date of acquisition were £ 142 000 (£108 000 land and buildings, £ 22 000 plant and equipment, £ 12 000 net current assets). Prepare the consolidated statement of financial position of H group as at 31.12.200X at acquisition
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Statements of financial position at the date S acquired H
H £000s S £000s
Land and buildings 650 105
Plant and equipment 110 21
Net current assets 163 11
923 137
Share capital £1 shares 800
Share capital 10p shares 125
reserves 123 12
923 137
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity feedback 25.5
Cost of control Non controlled interest
Purchase price FV 120
80% shares 100 20% shares 25
80% reserves 9.6 20% reserves 2.4
80% revaluation 4 20% revaluation 1
113.6 28.4
goodwill 6.4
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Consolidated statement of financial position of H group as at
31 December 200X£ 000s
Land and buildings (650 + 108) 758
Plant and equipment (110 +22) 132
goodwill 6.4
Net current assets (163-120+12) 55
951.4
Share capital £1 shares (only H) 800
Reserves (only H, S either cost of control or non-controlled interest)
123
923
Non-controlled interest 28.4
951.4
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Acquisition accounting later than the date of acquisition
(Activity 25.6)
• H Ltd purchased 80% of the equity share capital of S Ltd for cash at 31 December year 1 at a price of €1.50 per share, when the balance on S Ltd’s reserves stood at €2 000.
• The consolidation is required to be made at 31 December year 2, at which point the individual statements of financial position of the two companies are as follows:
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Acquisition accounting later than the date of
acquisition (Activity 25.6)
H Ltd € S Ltd €
Sundry current assets 35 000 6 000
Investment in S Ltd 9 600 –
Plant and machinery 60 000 5 000
104 600 11 000
Represented by shares of €1 40 000 8 000
Reserves 64 600 3 000
104 600 11 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.6 feedback
Sundry current assets 41 000
Plant and machinery 65 000
Goodwill 1 600
107 600
Share capital 40 000
Reserves 65 400
105 400
Minority interests 2 200
107 600
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Subsequent adjustments to purchase price
• Acquisition agreements often provide for adjustment to the cost of an acquisition depending on future events. These can be:
– The results of acquiree’s operations exceeding or falling short of an agreed level– The market price of securities issued as part of the purchase consideration being
made
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Inter-company trading and the elimination of unrealized
profits
• In order for a group to realize profit, the sale must be made to a customer outside of the group
• In the underlying individual accounts intra-group profit is included in the profit figure of the individual income statement and result of the individual company
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Fig 25.2 Inter-company trading and elimination of unrealized profits
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.9
Assets A €000s B €000s
Land and plant 1 000 200
Stock 600 400
Debtors 200 40
Investment in B 275 –
2 075 640
Liabilities
Creditors 30 16
2 045 624
Represented by Shares of €1 1 000 100
Reserves 1 045 524
2045 624
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.9 feedback Consolidated statement of financial position as at 30 June 200X
Assets €000s
Goodwill (note 1) 50
Land and plant 1 200
Stock (1000 – 10) 990
Debtors (240 – 2) 238
2 478
Liabilities
Creditors (46 – 2) 44
2 434
Represented by:
Shares of €1 1 000
Reserves 1 280.5
2 280.5
Minority interest (note 3) 153.5
2 434
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.9 feedback (cont’d)
Note 1
Cost of investment in B 275
Less ordinary shares acquired 75
Reserves acquired 75% x 200 150 225
50
Note 2
Reserves A 1 045
Reserves post-acquired B
75% (524 – 10 – 200) 235.5
1 280.5
Note 3
Minority interest 25
25% ordinary shares 128.5
25% reserves = 25% x 514 153.5
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.10
• The financial year-end of two entities A and B within the same group is 31 December. On 29 December A despatched goods to B to the invoice value of € 40 000 and charges B’s ledger account accordingly. B does not receive either goods or invoice until 4 January. Prepare the consolidation adjustment on B’s books and not any other adjustment that may be required on consolidation.
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.10 feedback
• B’s books as at 31 December
• B ledger books Dr Cr
• Goods in transit € 40 000
• A Current account € 40 000
• On consolidation the respective inner-company balances in the current accounts, which are now in agreement, will cancel out
• Remember this stock in transit contains unrealised profit
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Reconciliation of inter-company balances
• In relation to the group’s position as regards the outside world, these balances are internal balances and will, therefore, not require to be shown in the group statement of financial position. They are, in fact, cancelled on consolidation across the individual statements of financial position of group members.
• These adjustments only affect the consolidated accounts
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Preparation of more complex consolidated statements of
financial position
• Acquisition by stages• Reverse acquisitions• Adjustments to identifiable assets or liabilities• Disposal of part interest• Preparation of consolidated accounts involving more than one subsidiary
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Acquisition by stages
• With staged acquisitions one needs to determine the date when a subsidiary relationship exists, what the cost was and what the fair value of the assets and liabilities acquired was.
• The date of acquisition = the date when control was transferred
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.12 Acquisition by stages
• H acquired an interest in S as follows: – 10% of the voting shares for $150 000 on 1.4.01 – 30% of the shares for $460 000 on 1.4.02 – 40% of the voting shares for $800 000 on 1.4.03 – the remaining 20% for $350 000 on 31.3.05. – The fair values of the recognized assets and
liabilities of S at these dates were $1m, $1.5m, $1.75m and $2m respectively. Accounts are drawn up as at 31 March.
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.12 feedback
$
FV at first stage 1 000 000
Acquired 10% 100 000
Cost 150 000
Goodwill Stage 1 50 000
FV at second stage 1 500 000
Acquired 30% 450 000
Cost 460 000
Goodwill stage 2 10 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.12 feedback (cont’d)
$
FV at third stage 1 750 000
Acquired 40% 700 000
Cost 800 000
Goodwill stage 3 100 000
Total goodwill after third purchase 160 000
FV at fourth stage 2 000 000
Acquired 20% 400 000
Cost 250 000
Negative goodwill stage 4 50 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.12 feedback (cont’d)
Stage FV
1 100 000
2 450 000
3 700 000
4 400 000
1 650 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Reverse Acquisition
• When an enterprise obtains ownership of the shares of another enterprise but as part of the exchange transaction issues enough voting shares as consideration such that control of the combined enterprises passes to the owners of the enterprise whose shares have been acquired, then we have what has become known as a reverse acquisition. Although legally the enterprise issuing the shares may be regarded as the parent or continuing enterprise, the enterprise whose shareholders now control the combined enterprise is the acquirer.
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Reverse acquisition: illustration
• Enterprise A with a share capital of €100 shares issues a further 50 shares to acquire the complete shareholding of enterprise B consisting of 200 €1 shares, a one A share for four B shares exchange. In this case A now owns all B shares, 200,and A’s shareholders hold 100 A shares. B shareholders hold 50 A shares. Thus A shareholders retain control of A. If, however, A had issued 200 A shares to acquire the 200 B shares then B shareholders would now hold two-thirds of the shareholding of A and in ‘substance’ the acquiree, B, becomes the acquirer.
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Adjustments to identifiable assets or liabilities
• These can occur because:
– the acquirer was unaware of certain assets or liabilities of the acquiree
– the assets or liabilities did not satisfy recognition criteria
– or further information comes to light which enables more accurate estimation of fair values
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Adjustments to identifiable assets or liabilities (cont’d)
• How these adjustments are dealt with depends on whether they occur before or after the first complete annual accounting period subsequent to acquisition: – before and the adjustment is reflected in goodwill
providing the amount will be recovered from expected future economic benefits, otherwise it would be recognized as an expense
– after and the adjustment is reflected in income or expense not goodwill
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Disposal of part of an interest
• When a group disposes of part of an interest in a subsidiary undertaking a profit or loss on disposal will arise.
• Gain or loss= the difference between the carrying amount of the net assets of that subsidiary undertaking attributable to the group’s interest before the reduction and the carrying amount attributable to the group’s interest after the reduction together with any proceeds received
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.13
• The value of a subsidiary’s net assets at 31 March 200X is € 400 000. At this date the parent, which held a 100% share in the subsidiary, disposes of 40% for € 200 000. On the original acquisition of the subsidiary, goodwill of € 80 000 arose. This goodwill has not subsequently been impaired and is in addition to the net assets of € 400 000. Calculate the profit or loss on disposal.
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.13 feedback
€
Group share of net assets before disposal including goodwill (100% x (400 000+ 80 000))
480 000
Group share of net assets after disposal including goodwill (60% x(400 000 + 80 000))
288 000
Disposal proceeds 200 000
488 000
Profit on disposal 8 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Preparation of consolidated accounts involving more than
one subsidiary – Activity 25.15
• A plc acquired 5m €1 shares of B Ltd five years ago when the reserves of B stood at € 6m. B Ltd acquired 2.25m € 1 shares in C Ltd four years ago when the accumulated reserves of C were € 0.5m. A plc also acquired 3 m € 1 share of D Ltd two years ago when D’s reserves were € 0.3m. At the date of acquisition the net book value of all assets equated to fair value. There has been no issue of shares in any of these companies throughout the five-year period. The statements of financial position relate to the group companies as at 31.12.200X
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.15
A €m B €m C €m D €m
Fixed assets 45 5 1.5 2
Investment in B 16
Investment in C 4.5
Investment in D 4
Net current assets 32 18 2.5 1
97 27.5 4 3
Share capital 18 7.5 3 4
reserves 79 20 1 (1)
97 27.5 4 3
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Activity 25.15 – consolidated statement of financial position A
group
€ m
Goodwill 9.025
Fixed assets 53.5
Net current assets 53.5
116.025
Share capital 18
Reserves [79 +(20-6)2/3+(1-0.5)1/2+(-1-0.3)3/4]
87.605
Minority interest 10.42
116.025
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Consolidated statement of income
• The total revenues and expenditures of the parent and the subsidiary are included in the consolidated statement of income
• Intra-group balances and results need to be eliminated
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Consolidated statement of income: Example 25.4
High € Low €
Turnover 100 000 50 000
Cost of sales 75 000 30 000
Gross profit 25 000 20 000
Distribution expenses 4 000 3 000
Administration expenses 7 000 8 000
14 000 9 000
Investment income:
Dividends received 2 250
16 250
Taxation 7 000 3 000
Earnings 9 250 6 000
Retained earnings 22 000 4 000
31 250 10 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Consolidated statement of income: example 25.4 (cont’d)
High Low
Cost of High’s control of Low 90 000
Bought 75% of Low’s shares 75 000
Bought 75% of Low’s retained profits 3 000 78 000
Goodwill 12 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Consolidated statement of income: example 25.4 (cont’d)
Inter-company trading
Reduce High’s sales by 12 000
Reduce High’s profits by 1 000
Reduce Low’s stock by 1 000
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Consolidated statement of income:
example 25.4 (cont’d)Consolidated statement of income for the year ended 31.12.0X
€ €
Turnover (150 000 – 12 000) 138 000
Cost of sales (105 000 – 12 000 + 1 000) 94 000
44 000
Distribution expenses 7 000
Administration expenses 15 000 22 000
22 000
Taxation 10 000
Consolidated earnings on ordinary activities after tax 12 000
less Minority interest (25% x 6 000 – Low’s profit after tax) 1 500
Consolidated earnings for the financial year 10 500
Retained earnings 22 000
32 500
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Questions to be solved by regulators
• Definition of control• Method of accounting to be used for subsidiaries • How to account for other business relationships• Is merger accounting/pooling of interest a
suitable method?• Are there any other suitable methods available
e.g. fresh start method?
International Financial Reporting and Analysis, 5th editionDavid Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Questions to be solved by regulators (cont’d)
• Use of fair value for purchase consideration• How to deal with the goodwill within a business
combination• How and where should minority interests be
shown within the financial statements?• What other disclosure regulations are
required?
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