Introduction

 When a holding company (parent) purchases the share

capital of its subsidiary (or subsidiaries), each company
in the group:
 remains a legal entity in its own right; and
 is bound to maintain separate accounting records
 The parent company must present to its shareholders its
own financial statements and consolidated financial
statements.
 Exceptions – NZ IFRS 10 para 4
 A parent prepares consolidated financial statements
using uniform accounting policies for like transactions
and other events in similar circumstances (para 19).
2
 Consolidation (NZ IFRS 10)
 In consolidation the parent entity combines like its items of
assets, liabilities, equity, income, expenses and cash flows
with those of its subsidiaries (para B86 (a))
 The carrying amount of the parent's investment in each
subsidiary should be offset against the parent's portion of
equity of each subsidiary (para B86 (b))
 Intragroup balances, transactions, income and expenses
shall be eliminated in full (para B86(c))
 A parent presents non-controlling interests in its
consolidated statement of financial position within equity,
separately from the equity of the owners of the parent (para
22).
3
 Consolidation journals
 Adjustments for the purposes of consolidation are
made through consolidation journal entries.
 These consolidation journals are ONLY prepared for
the purposes of consolidation. (There are no
consolidated ledger accounts)
 They are posted onto the consolidation worksheet
only – they are NOT recorded in the books of the
parent or the subsidiary
 As a result, some consolidation adjustments are
repeated every time consolidated financial
statements are prepared

4
 Consolidation Worksheets
Consolidation journals are posted into the consolidation
worksheet in “adjustment” columns as follows:
Add down for
Parent Subsidiary sub-totals

Purpose: to remove the parent’s investment in the subsidiary and the effect of all inter-
entity transactions so that the final column shows an “external view”
 Steps in Consolidation
The principal entry on consolidation is to:
 Eliminate the investment in the subsidiary
 We need to do this same consolidation journal entry
each year until it becomes immaterial, or we sell the
subsidiary.
 Journal entry recorded in a consolidation journal:
Dr Share Capital
Dr Retained Earnings
Dr Goodwill
Cr Investment in Subsidiary Ltd
Eliminate investment in S. Ltd
6
 Further Steps in Consolidation
Step 1
 Agree any inter-company transactions
Step 2
 Eliminate inter-company transactions such as
sales/purchases, fees paid/received, rent
paid/received, etc. This is important to prevent
“double-counting”
 Remember that such items would not exist if the
transactions were made by a single accounting
entity.
7
 Steps in Consolidation - 3 & 4
Step 3
 Eliminate inter-company balances – they
wouldn’t exist if the two companies were a single
entity.
Step 4
 Eliminate unrealised inter-company profits
because such profits are illusory until realised
outside the group.

8
Unrealised Profit - Closing Inventory

 Having eliminated inter-company sales and

purchases, any profit component in closing
inventory needs elimination.

 Example: In its closing inventory S Ltd had

inventory bought from H Ltd for $120,000. The
inventory had cost H Ltd $100,000.

9
 Unrealised profit cont’d
 Eliminate the $20,000 unrealised profit:

Dr Cost of sales (Closing inventory) $20,000

Cr Inventory on hand (Bal. Sheet) $20,000
Elimination of unrealised profit on closing inventory

 If this related to the year ended 31 March 2012,

we would then have to consider the effect on the
following income year – ended 31 March 2013

10
Unrealised Profit - Opening Inventory
 The 2012 group profit was reduced by $20,000
– this was the effect of debiting closing inventory
(shown as part of Cost of sales).

 So debiting Cost of sales increases it and

therefore reduces Gross Profit, Net Profit, and
ultimately the closing balance in Retained
Earnings

11
 Unrealised Profit (cont’d)
 So Retained Earnings for the group at 31 March
2012 will decrease by $20,000.

 So on consolidation at 31 March 2013 the opening

balance of Retained Earnings (on 1 April 2012) will
also need to be reduced by $20,000.

 Consolidation journal entry at 31 March 2013:

Dr Opening Ret’d Earnings $20,000

Cr Opening inventory (COGS) $20,000
Eliminate last year’s unrealised profit from opening
inventory
12
 Shifting the unrealised profit
 The credit to opening inventory for 2012/13 in
Cost of sales has the effect of increasing gross
profit for that year - and eventually Retained
Earnings.
 So the adjustment for unrealised profit last year
is reversed the following year. This shifts the
unrealised profit into the year that it will be sold
outside the group. Profit is realised in that
following year.

13
 Unrealised Profit
– Non-current Asset Transfers
 If a non-current asset is transferred between
companies in the group, then where sale price =
book value, no further adjustment is required.
 But what if the asset is sold above or below book
value?
 There needs to be a restatement of the
position, as if the asset had been transferred at
book value.

14
 Asset Transfers - Example
 H Ltd sold S Ltd a truck which had cost H Ltd
$140,000 some years ago. On 1 April 2011 the
truck was sold to S Ltd for $58,000, but it had a
carrying value of $48,000, with accumulated
depreciation of $92,000.

 In S Ltd.’s books:
Dr Truck 58,000
Cr Bank 58,000
Purchase of truck
15
 Asset Transfers (cont’d)
 And in H Ltd’s books:
Dr Accum. depn. 92,000
Dr Bank 58,000
Cr Truck 140,000
Cr Gain on disposal 10,000
Sale of truck with gain on sale

 And on consolidation:
Dr Truck 82,000
Dr Retained Earnings 10,000
Cr Accum. depn. 92,000
Consolidation adjustment eliminating gain on sale
16
 Depreciation Adjustment
 S Ltd will depreciate the truck for the 2011/12 and
20012/13 income years. Assuming a common depn. rate
(say 30% D.V.), in S Ltd.’s books:

2011/12:
 Dr Depn. expense 17,400
Cr Accum. depn. 17,400
Depreciation charge (58,000 @ 30% DV)

2012/13:
 Dr Depn. expense 12,180
Cr Accum. depn. 12,180
Depreciation charge (40,600 @ 30% DV)
17
 Depreciation (cont’d)
 However, if the asset had not been sold to S Ltd then H
Ltd would have continued to depreciate it as follows:

 2011/12:
Dr Depn. expense 14,400
Cr Accum. depn. 14,400
Depreciation charge (48,000 @ 30% DV)

 2012/13:
Dr Depn. expense 10,080
Cr Accum. depn. 10,080
Depreciation charge (33,600 @ 30% DV)
18
 Depreciation (cont’d)
 The depreciation expense overcharge for the
group in 2011/12 and 2012/13 needs to be
eliminated – being depreciation charged against
the unrealised profit component of this non-
current asset.

Year Depn. Shown Non-adjusted Difference

2011/12 17,400 14,400 3,000
2012/13 12,180 10,080 2,100
19
 Depreciation (cont’d)
 Alternatively, based on the unrealised profit
component of $10,000 the overcharge is:
 2012 10,000 @ 30% DV = 3,000
 2013 7,000 @ 30% DV = 2,100

 Consolidated Journal entry in 2013:

Dr Accum. depn. 5,100
Cr Opening Ret’d Earnings 3,000
Cr Depn. expense 2,100
Depreciation adjustment for current and prior periods

20
 Steps in Consolidation - 5
Step 5
 Eliminate inter-company dividends paid/received,
otherwise the holding company is effectively
paying dividends to itself!
 Only dividends paid externally should be shown
in consolidated financial statements

21