MBA

FINANCIAL REPORTING AND ANALYSIS

EXERCISE 1 – Consolidation accounting

On January 1, X company H acquires 60% of the share capital of company S.

The cost of the investment in S is 5900 €. On the date of the acquisition, the book value of the owners’ equity
(O.E.) of company S is 6000 €.
On the same date, the fair value of assets and liabilities of S equals their book value, except for:
- some buildings, which are recorded in the balance sheet of S for 1000 € and whose fair value is
estimated to be equal to 1200 €, and
- some plants whose book value is 800 € and whose fair value is 900 €.
The difference between the cost of the investment and the fair value of the O.E. of the subsidiary is assigned
to goodwill.
The individual financial statements of the two companies at January 1, X are reported in the worksheet.
Assume that H applies the proportional recognition of goodwill.

Required:
 Using the worksheet, make the consolidation adjustment. Consider that the company prepares its
consolidated financial statements according to IAS/IFRS. The final consolidation column is not
required.

 Assuming that H applies the full goodwill method and that the fair value of non-controlling interests
is 3000, calculate the value of goodwill and the non-controlling common stock and reserves.
 H S Aggregate (1)

Balance Sheet
ASSETS
Non current assets
Property, plant and equipment 2.900 4.400 7.300
Goodwill
Other intangible assets
Investments 5900 5900
Financial receivables 1000 1000 2000
Deferred tax assets
Current assets
Inventories 360 750 1110
Trade receivables 500 1500 2000
TOTAL ASSETS 10660 7650 18310
LIABILITIES AND O.E.
Group O.E.
Common stock 6700 4000 10700
Retained earnings 1350 2000 3350

Non-controlling interests
Common stock and reserves

Non current liabilities

Financial payables 230 200 430
Provisions for risks and charges 800 800
Deferred tax liabilities
Current liabilities 2380 650 3030
TOTAL LIABILITIES + O.E. 10660 7650 18310
SOLUTION

H S Aggregate (1)

Balance Sheet
ASSETS
Non current assets
Property, plant and equipment 2.900 4.400 7.300 +300
Goodwill +2120
Other intangible assets
Investments 5900 5900 -5900
Financial receivables 1000 1000 2000
Deferred tax assets
Current assets
Inventories 360 750 1110
Trade receivables 500 1500 2000
TOTAL ASSETS 10660 7.650 18310 -3480
LIABILITIES AND O.E.
Group O.E.
Common stock 6700 4000 10700 -4000
Retained earnings 1350 2000 3350 -2000

Non-controlling interests
Common stock and reserves 2520

Non current liabilities

Financial payables 230 200 430
Provisions for risks and charges 800 800
Deferred tax liabilities
Current liabilities 2380 650 3030
TOTAL LIABILITIES + O.E. 10660 7650 18310 -3480

ASSUMING THE FULL GOODWILL RECOGNITION:

- Goodwill = (5900+3000) – 100%*(6000+300) = 2600

- Non-controlling common stock and reserves = 3000