ACCA

IFRS Train the Trainers Day 2 Consolidated Financial Statements Additional Questions

Consolidation Techniques
When approaching group consolidation, it will be useful to tackle the consolidation through the following working steps:

Consolidation for statement of financial position

Working 1: Group Structure A 70% B 80% C

Working 2: Net assets of each subsidiary

At balance sheet date $000 X X X X/(X) X (to W4)

Share capital Share premium Reserves Fair value adjustments

At acquisition $000 X X X X/(X) X (to W3)

Post acquisition $000

X X/(X) X (to W5)

Working 3: Goodwill
Cost of investment Less: group share of net assets at acquisition (W2) Goodwill on acquisition Less: impairment to date Goodwill to consolidated balance sheet $000 X (X) X (X) X

Working 4: Minority interest

MI share of net assets at balance sheet date (W2) Less: unrealised profit in inventory (if any) $000 X (X)

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MI to consolidated balance sheet

Working 5: Group retained profits

Parent company (100%) Add: income from subsidiary/associate not accrued Subsidiary: Group share of post acquisition profit (W2) Less: goodwill impairement (W3) Less: group share of unrealised profit (if any) Total group profits $000 X X X (X) (X) X

Consolidation for group income statement

Working 1 (Group structure) Same as before Working 2 (Net assets at acquisition to be able to calculate goodwill) Same as before Working 3 (Goodwill to calculate impairment) Same as before Working 4: Consolidation schedule If the subsidiary has been acquired part way through the year, you will have to apportion income and expenses. It is worth setting this out in a consolidation schedule working. All items from revenue down to profit after tax must be time apportioned.
Subsidiary (x/12 if apportioned) $000 X

Revenue

Parent $000 X

Adjustments $000 (X)

Consolidated $000 X

Profit after tax

Working 5: Minority interest

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MI share of subsidiary profit after tax (must be time apportioned if a mid-year acquisition)

Working 6: Group retained earnings brought forward

Parent (100% of reserves at beginning of year) Subsidiary: group share of post acquisition reserves at beginning of year Less: goodwill impairment at beginning of year $000 X X (X) X

If the subsidiary had been acquired during the year, then there will be no post-acquisition reserves brought forward as the subsidiary did not belong to the group at that date.

Consolidation for Associates

Associates are not consolidated as the parent does not have control. Instead they are equity accounted. Investment in associate:
Cost Add: share of increase in net assets Less: impairment losses $000 X X (X) X

You will need to produce W2 to calculate the post-acquisition profits. In the group retained earnings (W5), the groups share of As post acquisition profits must be included. Income statement Include in the groups share of the Associates profit after tax less any impairment losses. Fair value adjustments

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IFRS 3: Business combinations - requires that on acquisition, both the cost of the investment and the net assets acquired are recorded at their fair value. Assets and liabilities must be recognized if they are separately identifiable and can be reliably measured. The future intentions of the acquirer must not be taken into account when calculating fair values. (Fair values is the amount for which an asset could be exchanged, or liability settled, between knowledgeable, willing parties in an arms length transaction)

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Worked Example 1: Consolidated financial statements The balance sheets of TT Ltd and UU Ltd as at 31 May 2009 are as follows:
TT Ltd $000 Assets Non-current assets Property, plant and equipment Investment in UU Ltd Current assets UU Ltd $000

6,910 1,400 8,310 3,110 11,420

1,640

1,120 2,760

Equity Ordinary share capital Retained earnings Liabilities Current liabilities

4,000 5,380 9,380 2,040 11,420

500 1,550 2,050 710 2,760

The following information is available: (A) TT Ltd acquired 70% of the share capital of UU Ltd on 31 May 2001. There have been no changes in the share capital of UU Ltd since that date. (B) On 31 May 2001, the fair value of the non-current assets of UU Ltd was $150,000 higher than the book value on that date. This valuation has not been reflected in the books of UU Ltd. (C) On 31 May 2001, the retained earnings of BB Ltd were $850,000. (D) Goodwill has suffered no impairment since 31 May 2001. Required: Prepare a consolidated balance sheet as at 31 May 2009.

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W1: Group structure TT 70% UU W2: Net assets

Share capital Retained earnings Fair value adjustments

At acquisition $000 500 850 150 1500

At balance sheet date $000 500 1550 150 2200

Post acquisition $000 0 700 0 700

W3: Goodwill
$000 Cost of investment Less: group share of net assets at acquisition (W2) Goodwill to consolidated balance sheet 1400 -1050 350

W4: Minority Interest 30% X $2,200,000 = $660,000 W5: Group retained profits
Parent company (100%) Add: income from UU (70%) Total group profits $000 5380 490 5870

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Consolidated Statement of Financial Position: TT

$000 Assets Non-current assets Property, plant and equipment (6910+1640+150) Goodwill Current assets (3110+1120)

8,700 350 9,050 4,230 13,280

Equity Ordinary share capital Retained earnings Minority interest Liabilities Current liabilities (2040+710)

4,000 5,870 9,870 660 2,750 13,280

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Worked Example 2 W1: Group structure H 80% S W2: Net assets

S Rep date 75,000 51,000 10,000 (3,000) 133,000 A Post acq 0 36,000 (3,000) 33,000 Acq 35,000 10,000 Rep 35,000 34,000 Post 24,000

30% A

OSC Retained earnings Fair value adj Depreciation (3/10 X FV)

Acq 75,000 15,000 10,000 100,000

45,000

69,000

24,000

W3: Goodwill
Consideration Share of net assets of S (80% X 100,000) Less: impairement loss (30%) S $ 92,000 (80,000) 12,000 (3,600) 8,400

W4: Non-controlling interest

20% X 133,000 Less: Unrealised profit in inventory (1,000X20%) NCI 26,600 (200) 26,400

W5: Retained earnings

Parent Less: Goodwill impairment S (W3) A (W6) Group share post acquisition S - 80% X 33,000 (W2) A - 30% X 24,000 (W2) $ 89,000 (3,600) (450) 26,400 7,200

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Less: Unrealised profit in inventory (80% X 1,000)

(800) 117,750

W6: Investment in associate

Cost Share of increase in net assets - 30% X 24,000 (W2) Less: Impairment $ 15,000 7,200 22,200 (450) 21,750

W7: Inter-company trading Subsidiary made sales to parent 80% Group / 20% NCI
Unrealised profit - 10,000 X 20% X 50% Dr Group retained earnings - 80% X 1,000 Dr NCI - 20% X 1000 Cr Inventory $ 1,000 800 200 1,000

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Group income statement for the year ended 30 June 2008 Revenue (500,000 +200,000 - 10,000 intra-group) Operating Costs (400,000 + 140,000 + 1,200 goodwill impairment - 10,000 intra-group + 1,000 FV adjustment depreciation + 1,000 inventory) Profit from operations Income from associate - 30% X 26,000 - goodwill impairment 150) Profit before tax Tax (23,000 + 21,000) Profit for the period Attributable to: Equity holders of the parent Non-controlling interest (20% X 39,000 - 1,000 X 2008 Depreciation on FV - 1,000 inventory) Profit for the financial year $ 690,000

(533,200) 156,800 7,650 164,450 (44,000) 120,450

113,050 7,400 120,450

Consolidated statement of financial position at 30 June 08 $ Goodwill (W3) 8,400 Investment in associate (W6) 21,750 Tangible non-current assets (87,000 +88,000 + 10,000 FV 3,000 FV depreciation) (W2) 182,000 Net current assets (95,000 + 38,000 - 1,000 inventory) (W2) 132,000 344,150 200,000 117,750 26,400 344,150

Share capital Retained earnings (W5) Non-controlling interst (W4)

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