AC2091 Financial Reporting

Session 4

Accounting for Groups :

Consolidated Statement of Comprehensive
Income (Consolidated Income Statement)

Joanna Chia

For SIM Students’ Use Only

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Not to be reproduced for sale.

DEFECTS ARE INHERENT IN THE ORIGINAL COPY

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 Consolidated Statement of
Comprehensive Income
(Consolidated Income Statement)
• Also known as the Consolidated Statement of
Profit or Loss and Other Comprehensive
Income
• Must be prepared by the parent at the year end
together with the other consolidated financial
statements,
• After control is acquired over the subsidiary
• & for each of the subsequent accounting
periods. 2
 Consolidated Statement of
Comprehensive Income
(Consolidated Income Statement)
• May also be prepared in isolation for certain
specific purposes

• Such as for determination of quarterly or half-

year group profits to be reported to the stock
exchange

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• If there are no inter-company transactions,
• the preparation of the consolidated statement
of comprehensive income will be a simple task
of just simply adding together,
• line by line, all the items in the individual
income statements of the parent + subsidiary
company.
• However, if the company invests in the
company somewhere after the start or loses
control during the accounting period,
• then all line items need to be proportionally
consolidated
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• If the parent company acquires < 100% of the
subsidiary’s issued share capital,
• part of the subsidiary’s profit would be
attributable to the minority shareholders: ie NCI.
• Accounting standard requires that ‘NCI in the
net income of consolidated subsidiaries for the
reporting period are identified and adjusted
against the income of the group in order to
arrive at the net income attributable to the
owners of the parent company …’
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• According to the requirements of the
accounting standard:
• Parent + 100% of the subsidiary’s income
statement’s items (even though parent
company acquired < 100% of the
subsidiary’s issued share capital)
• Non-controlling interest in the
subsidiary’s profit is then deducted from
the profit after tax to arrive at “Profit
attributable to shareholders”.

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• This treatment of NCI in the profit of the
subsidiary in the consolidated statement of
comprehensive income is consistent with
• the treatment of the NCI in the net assets of
the subsidiary in the consolidated statement
of financial position.
• Note that NCI is shown as a single item and
calculated based on the subsidiary’s profit
after tax.

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• Important: Do not use the proportional
method in the consolidated statement of
comprehensive income ie if the parent
company controls 80% of the subsidiary,
100% of the income and expenses must be
added together excluding items that require
adjustments such as intercompany
transactions, unrealized profits, etc.
• and not 80% (proportion) of these individual
items,
• Deduct only the Non-controlling interest as
one lump sum after profit for the year.
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 Preparing Consolidated Statement of
Comprehensive Income: Steps :
1) Include all of S’s income and expenses,
100% line by line up to profit after tax, (even if did
not own full 100% of S, so long as there is control &
is recognised a subsidiary)
Exception: If S is acquired during the current year
(partial not from the beginning of the year), then add
only that part of the year’s post acquisition profits, by
time apportionment eg X 7/12mths if acquired on 1 June
in the current year to year end 31 Dec. Exclude pre-acq.
income & expenses

2) Exclude/eliminate/cancel any intra-group

trading/intercompany sale from Sales(Turnover)
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and Cost of Sales.
 Consolidated Statement of Comprehensive
Income: Summary of Steps :
3) Unrealised Profits
- If any items sold by one group company to another are
still in the closing inventory (interco only)
i.e. still remaining at balance sheet date eg Goods in
Transit and interco inventory
Interco inventory values to be adjusted to the lower of
cost and net realisable value to the group
ie. Adjust for unrealised profit in interco closing
inventory
If there were any opening inventory with unrealized
profits from the previous year, the unrealized
profits should be now realized in the current year
& should be added to the gross profit (cost of10
sales reduced)
 Consolidated Statement of
Comprehensive Income :
Tax and Non-controlling Interest
4) Tax - add both P & all S taxation
5) Profit for the year
6) Less: Non-controlling Interest (NCI)*
7) Attributable to Equity shareholders of the company
*Adjust for NCI in S’s profit in a separate line.
i) If subsidiary has only equity shares, take non-controlling interest’s %
share of subsidiary’s profit after tax
ii) If subsidiary has preference shares, then:
NCI’s % share of preference dividends(even if NCI share’s > 50%) +
NCI’s % share of profit after tax and after preference dividends.
iii) Eliminate any % share of unrealized profits from interco inventories
sold from S to P (upstream only, do not adjust downstream
unrealized profits)
iv) Adjust any % share of the current year’s impairment losses-goodwill
(8) Balance of profit after NCI is attributable to parent
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ie Equity shareholders of the company.
Consolidated Statement of Comprehensive Income Format (for exam purposes only*)

The format in the consolidated statement of comprehensive income to be used for

exam purposes(slightly different from the published accounts format) is as follows:
£
Turnover(Revenue) X
Cost of sales (X)
Gross profit X
Investment revenue X
Other gains and losses X
Share of profits of associates (if any) X
Distribution expenses (X)
Administrative expenses (X)
Finance costs (Interest expenses) (X)
Other expenses (X)
Profit before tax X
Income tax expense (X)
Profit for the year X

Non-controlling interest (X)

Attributable to: Owners of the parent X

Less: Dividends paid* (X)
Retained Profit for the year* X
Retained Profit b/f* X
Retained Profit c/f* X

*For exam purposes, these line items must be included to prevent a loss of marks.
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Note that In published financial statements, these items should be presented in the
Statement of Changes in Equity.
 Pre & Post-Acquisition Reserves
• At any date subsequent to the date of acquisition, the
reserves can be separated into two parts:

1)“pre-acquisition reserves” - arose before the

subsidiary was acquired and

2)“post-acquisition reserves” - arose after the subsidiary

was acquired.

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 Pre & Post-Acquisition Reserves
• Important to make the distinction between Pre & Post
• Because pre-acq reserves exists at the date of
acquisition - must be taken to goodwill computation and
eliminated against the cost of investment in the
consolidated statement of financial position - in the
consolidation process.
• In the consolidated statement of comprehensive income,
if retained earnings are presented, as the exam requires
it”
• Pre-acq retained profits /retained earnings must be
eliminated as they are not earned and only the post-acq
profits earned after acquisition,
• i.e. only post-acq retained earnings, are shown in the14
consolidated accounts.
 Pre & Post-Acquisition Reserves
Summary
Acquired Subsidiary on 1st day
or since Incorporation

• P Ltd acquired S Ltd on the first 1st day or since

incorporation, of the current year,
• Profits for the current year are all post acquisition
profits.
• No pre-acq as retained earnings balance b/f as the
subsidiary is acquired in current year
• If subsidiary is acquired “since incorporation”,
all retained profits b/f are post acquisition profits ie
no pre-acquisition profits. 15
 Acquired Subsidiary Before
the Beginning of Current Year:

• P Ltd acquired S Ltd before the beginning of the

current year,
• the results for current year are all post acquisition
profits,
• Retained earnings balance b/f from last year is
partly post ie only the post acquisition balance b/f.
(P’s retained earnings + % of S’s retained earnings after
deducting pre-acq)

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 Acquired Subsidiary
somewhere during the year
(after the 1st day of the current year),

• P Ltd acquired S Ltd during the current year

after the 1st day of the current year.
• Only part of the results that is from the date of
acquisition is post,
• the rest are pre acquisition and not to be
taken in the retained earnings account.
(no S retaining earnings balance b/f on the
consolidated statement of comprehensive income)
• Use time basis of apportioning the profits unless
otherwise stated in exam question. 17
 Intragroup or Intercompany Transactions
• Companies in a group may trade or enter into
any transaction with each other, as with other
companies outside the group.
• These intercompany transactions give rise to
several problems in the consolidation
process.
• Accounting standard requires that these
“…intragroup balances & intragroup
transactions …(be) eliminated in full”.

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 Intercompany Transactions
• When parent company enters into a
transaction with its subsidiary, (or vice versa),
it will record the transaction in its books, like
any other transactions entered into with other
companies outside the group.
• Eg, if the parent company makes a sale to its
subsidiary, the parent company will record
“sales” (or “sales to subsidiary”) in its books,&
• the subsidiary will record “purchases or
inventory” ie purchases from Parent company

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 Intercompany Transactions
• However, on consolidation, the parent
company & subsidiary are deemed to be a
single (economic) entity,
• it does not make sense to report in the
consolidated accounts that the group makes
a sale to itself or makes a purchase from
itself.
• Therefore, in consolidation, these
“intercompany transactions” would have to be
eliminated.

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 Eliminate Intercompany Debt
– Current Account / Amounts due to/from
• If the subsidiary has not been paid/settled the
intercompany transactions, the subsidiary will
report in its own individual statement of
financial position as “accounts payable” or
“amount due to parent company” or
“current account”,
• & the parent company will report in its balance
a “accounts receivable” or “amount due from
subsidiary” or “current account”
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 Intercompany Debt
• Again it does not make sense to report these
interco amounts in the accounts payable and
accounts receivable in the consolidated
statement of financial position, as the group
cannot owe itself any money.
• Thus, the inter-company debt in the accounts
receivable, amounts due from P or S, current
accounts(under CA ) & Accounts payable,
amounts due to P or S and current
accounts(under CL) have to be eliminated in
the consolidation process. 22
 Inter-Company Sale of Inventory
• give rise to problems as the transaction
involve some parts of the goods that were sold
to an outside party and
• some remaining as inventory within the group
at the end of the accounting period.

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Inter-Company Sale of Inventory –
Eliminate Unrealised Profits
• Intercompany profit on the goods that is held
by the company as intercompany ending
inventory is deemed to be unrealized,
• whereas inter-company profit on the goods
that is in turn sold by P or S to customers
outside the group is deemed to be realized,
from the group’s viewpoint.

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 Inter-Company Sale of Inventory
- Opening Inventory
• Under the first-in-first out (FIFO) cost flow
assumption, the goods that remained in the
statement of financial position as ending
inventory within the group & b/f to the next
period as opening inventory are assumed to
be sold to outsiders (and the inter-company
profit therein would be deemed realized from
the group’s viewpoint) in the following
accounting period.
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 Inter-Company Sale of
Depreciable Assets
• Inter-company sale of depreciable assets gives
rise to the same problem as in the case of inter-
company sales involving non-depreciable
assets, except for the subsequent depreciation
charges.
• Subsequent depreciation charges to income
statement may be seen as a sale of a portion of
the depreciable asset to outsiders.
• (This argument can be appreciated more easily
in a manufacturing concern where the
depreciation expense, as much as raw material26
used, forms part of goods manufactured).
 Inter-Company Sale of
Depreciable Assets – Eliminate
unrealized profits
• Subsequent depreciation charges are
therefore treated as a gradual realization of
the initial unrealized profit on an inter-
company sale of depreciable asset,
• as in the case of unrealized profit on an inter-
company sale of inventory which is deemed
to be gradually realised in a subsequent
period when the inventory are ultimately sold
to outsiders. 27
 Inter-Company Dividends
• Inter-company or Intra-group dividends refer to
ordinary dividends of the subsidiary due to the
parent.
• When the dividend is paid during the year,
and credited by the parent company, no
problem arises as there is an income item in
the parent company

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 Intercompany Dividends
• If S Ltd has not paid the dividend, P Ltd may not
have recorded the dividend at all.
• S Ltd’s books would show a dividend appropriation
against its retained profits, & a dividend payable
account,
• whereas P Ltd’s books did not record any amounts
relating to the inter-company dividend.
• Need to update P Ltd’s books with the dividend.
• Then eliminate both the income statement item and
balance sheet items relating to the inter-company
dividend.
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 Intercompany Dividend
in Investment Income / Dividend Receivable

• Exclude/eliminate any dividend receivable

from Subsidiary also exclude all dividend
payable of the subsidiary except the portion
to NCI.
• Only dividend income from trade investment
(no control) other than from S and
associates, can be consolidated (added).

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 Intercompany Transactions Summary:

• Eliminate any intercompany transactions

• Eliminate unrealised profits in inventory
• Eliminate intercompany sale of depreciable
assets’ unrealised profit portion only of
depreciation in the statement of
comprehensive income

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 Impairment Loss on Goodwill
• IFRS 3 prohibits the amortisation of goodwill that
was applied in the previous UK Accounting standard
FRS 10 Goodwill and Intangible Assets.
• Instead IFRS 3 specify that goodwill must be tested
for impairment at least annually in accordance with
Impairment of Assets
• IAS 36 state that if the recoverable amount of the
unit exceeds the carrying amount of the unit, the unit
and the goodwill allocated to that unit is not impaired
• but if the carrying amount of the unit exceeds the
recoverable amount of the unit, the entity must
recognise an impairment loss in the statement of
comprehensive income. 32
 Impairment Loss on Goodwill
• Any impairment losses on goodwill should be charged
to the statement of comprehensive income, against
the parent company’s (not subsidiary’s) profit.
• Reason: Goodwill on consolidation is calculated
without regard to minority shareholders, therefore NCI
should not be affected by the subsequent impairment
of the goodwill.
• However, under the full goodwill method 2: “Total
goodwill impairment loss be allocated against the
parent company and the NCI in the proportion of their
respective holdings in the subsidiary company”
(Dagwell et al 2012, p. 446).
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 Goodwill Amortisation – FRS 10
• Before the IAS was adopted, FRS 10 requires
goodwill on consolidation to be amortised on a
systematic basis over its useful life.
• The amortization period should not exceed 20 years,
however, if a company either amortises over 20
years
• or does not amortise at all, it has to carry out an
impairment test in accordance with FRS 11
‘Impairment of Fixed Assets and Goodwill’ (Glautier
& Undertown 2001).
• If it is found at any time that the goodwill is not
supported by future economic benefits, it should, to
the extent necessary, be charged to income in the
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period in which the determination is made
 Goodwill Impairment /
Gain on Bargain Purchase
• Impairment loss on goodwill for the year only
to be charged to the statement of
comprehensive income.
• Accumulated impairment losses are adjusted
in the statement of financial position.
• Gain on bargain purchase to be added to
profits in Income statement ie. to the retained
earnings
• Show it as a separate line item
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 Retained Earnings & Dividends
• Retained Earnings B/F from last year
Only P’s profits + group’s share of post
acquisition profits in S.

• Dividends
Only P dividends are to be included.
Exclude S’s dividends.

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• Transfers to Reserves
Only P’s + group’s share of S transfers to
reserves.

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 Loss of Control
• ‘A parent entity might subsequently lose
control over the subsidiary and
• it is not necessary for a change in the level
of ownership to occur for control to be lost.
• Once an entity has lost control, the
consolidated statement of comprehensive
income is only to include the results of the
subsidiary for the period during which
control existed.’ (Deegan 2012, p. 881)

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 Readings:

• UOL AC2091 Financial Reporting 2017 Subject

Guide: Chapter 17, pp. 213-219

• Alexander et al (2017) Textbook:

Chapter 26, pp.617-624

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 References:
• Alexander, D., Britton A,, Jorissen A, Hoogendoorn,
M. & van Mourik, C. 2017, International Financial
Reporting and Analysis 7th edn, South-Western
Cengage Learning. UK.

• Haslam, J. & Chow, D. 2017, Financial Reporting,

UOL Subject Guide, University of London
International Programmes, Publications Office, UK

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