Principles of consolidated financial statements

Test your understanding 1

1. Which of the following definitions is not included within the definition of control per
IFRS 10?
A. Having power over the investee
B. Having exposure, or rights, to variable returns from its investment with the investee
C. Having the majority of shares in the investee
D. Having the ability to use its power over the investee to affect the amount of the
investor’s returns

2. Which of the following situations is unlikely to represent control over an investee?

A. Owning 55% and being able to elect 4 of the 7 directors
B. Owning 51 %, but the constitution requires that decisions need the unanimous
consent of shareholders
C. Having currently exercisable options which would take the shareholding of the
company to 55%
D. Owning 40% of the shares, but having the majority of voting rights within the
company

3. Which of the following is NOT a condition which must be met for the parent to be
exempt from producing consolidated financial statements?
A. The activities of the subsidiary are significantly different to the rest of the group and
to consolidate them would prejudice the overall group position
B. The ultimate parent company produces consolidated financial statements that
comply with IFRS Standards and are publicly available
C. The parent’s debt or equity instruments are not traded in a public market
D. The parent itself is a wholly-owned subsidiary or a partially owned subsidiary whose
owners do not object to the parent not producing consolidated financial statements

4. Which of the following statements regarding consolidated financial statements is

correct?
A. For consolidation, it may be acceptable to use financial statements of the subsidiary
if the year-end differs from the parent by 2 months
B. For consolidation, all companies within the group must have the same year-end
C. All companies within a group must have the same accounting policy in their
individual financial statements
 D. Only 100% subsidiaries need to be consolidated
Solution:
1. C – While having the majority of shares may be a situation which leads to control, it
does not feature in the definition of control per IFRS 10.
2. B – The fact that unanimous consent is required would suggest that there is no control
over the investee.
3. A – The activities of the subsidiary are irrelevant when making the decision as to
whether to produce consolidated financial statements or not.
4. A – IFRS 10 states that where the reporting date for a parent is different from that of a
subsidiary, the subsidiary should prepare additional financial information as of the same
date as the financial statements of the parent unless it is impracticable to do so.
If it is impracticable to do so, IFRS 10 allows use of subsidiary financial statements made
up to a date of not more than three months earlier or later than the parent's reporting
date, with due adjustment for significant transactions or other events between the
dates.
The companies do not have to have the same policies in their individual financial
statements, but adjustments will be made to prepare the consolidated financial
statements using the group policies. All subsidiaries need to be consolidated, not just
100% owned ones.

Illustration 1
Statements of financial position at 31 December 20X4
P S
$000 $000
Non-current assets 60 50
Investment in S at cost 50
Current assets 40 40
150 90

Ordinary share capital ($1 shares) 100 40

Retained earnings 30 10
Current liabilities 20 40
150 90

P acquired 100% of the shares in S on 31 December 20X4 at a cost of $50,000.

Prepare the consolidated statement of financial position at 31 December 20X4.
Solution:
Approach
1. The balance on ‘investment in S at cost’ in P’s statement of financial
position will be replaced by the underlying assets and liabilities which the investment
represents, i.e. the assets and liabilities of S.
2. The cost of the investment in the subsidiary is effectively cancelled with the ordinary
share capital and reserves of S. This is normally achieved in consolidation workings
(discussed in more detail below). However, in this simple example, it can be seen that
the relevant figures are equal and opposite ($50,000), and therefore cancel directly.
This leaves a consolidated statement of financial position showing:

 the net assets of the whole group (P + S)

 the share capital of the group, which equals the share capital of P only, $100,000
 retained earnings comprising profits made by the group. S is purchased on the reporting
date, therefore there are no postacquisition earnings of S to include in the group
reserves. So the consolidated retained earnings will only include the $30,000 retained
earnings of the parent.
By adding the net assets of each company, and cancelling the investment in S against the share
capital and reserves of S, we arrive at the consolidated statement of financial position given
below.
P consolidated statement of financial position at 31 December 20X4
$000
Non-current assets (60,000 + 50,000) 110
Current assets (40,000 + 40,000) 80
190

Share capital ($1 ordinary shares) 100

Retained earnings 30
Current liabilities (20,000 + 40,000) 60
190

Note: Under no circumstances will any share capital of any subsidiary ever be included in the
figure of share capital in the consolidated statement of financial position.

Test your understanding 2

The following statements of financial position have been prepared at 31 December 20X8.
 Dickens Jones
$ $
Non-current assets:
Property, plant & equipment 85,000 18,000
Investment: Shares in Jones 65,000
Current assets 160,000 84,000
305,000 102,000

Equity:
Ordinary $1 shares 65,000 20,000
Share premium 35,000 10,000
Retained earnings 70,000 25,000
170,000 55,000
Current Liabilities 135,000 47,000
305,000 102,000

Dickens acquired 16,000 ordinary $1 shares in Jones on 1 January 20X8, when Jones’ retained
earnings stood at $20,000 and its share premium was $10,000. On this date, the fair value of
the 20% non-controlling shareholding in Jones was $12,500.
The Dickens Group uses the fair value method to value the noncontrolling interest.
Prepare the consolidated statement of financial position of Dickens as at 31 December 20X8.
Solution:
Dickens: Consolidated statement of financial position as at 31 December 20X8
Non-current assets $
Goodwill (W3) 22,500
Property, plant and equipment (85,000 + 18,000) 130,000
Current assets (160,000 + 84,000) 244,000
369,500

Equity
Share capital 65,000
Share premium 35,000
Group retained earnings (W5) 74,000
Non-controlling interest (W4) 13,500
187,500
Current liabilities (135,000 + 47,000) 182,000
369,500

(W1) Group structure

 (percentage of shares purchased 16,000/20,000 = 80%)
D

1 Jan X8 80%
J

(W2) Net assets of Jones

Acquisition Reporting date Post-acquisition
$ $ $
Share capital 20,000 20,000 -
Share premium 10,000 10,000 -
Retained earnings 20,000 25,000 5,000
50,000 55,000 5,000

(W3) Goodwill
Parent holding (investment) at fair value 60,000
NCI value at acquisition 12,500
72,500
Less: Fair value of net assets at acquisition (50,000)
Goodwill on acquisition 22,500

(W4) Non-controlling interests

NCI value at acquisition (as in (W3)) 12,500
NCI share of post-acquisition reserves (20% × 5,000 1,000
(W2))
13,500

(W5) Group retained earnings

Dickens 70,000
80% Jones post-acquisition profit (80% × 5,000 (W2)) 4,000
74,000
 Test your understanding 3
Goodwill
Daniel acquired 80% of the ordinary share capital of Craig on 31 December 20X6 for $78,000. At
this date the net assets of Craig were $85,000.
What goodwill arises on the acquisition
I. if the NCI is valued using the proportion of net assets method?
II. if the NCI is valued using the fair value method and the fair value of the NCI on the
acquisition date is $19,000?
Solution:
I. Parent holding (investment) at fair value 78,000
NCI value at acquisition (20% × $85,000) 17,000
95,000
Less: Fair value of net assets at acquisition (85,000)
Goodwill on acquisition 10,000

II. Parent holding (investment) at fair value 78,000

NCI value at acquisition 19,000
97,000
Less: Fair value of net assets at acquisition (85,000)
Goodwill on acquisition 12,000

Illustration 2
Cost of Investment
Jack acquired 24 million $1 shares (80%) of the ordinary shares of Becky by offering a share-for-
share exchange of two shares for every three shares acquired in Becky, and a cash payment of
$1 per share payable three years later. Jack's shares have a nominal value of $1 and a current
market value of $2. The cost of capital is 10% and the value of $1 receivable in 3 years’ time can
be taken as $0.75.
I. Calculate the cost of investment and show the journals to record it in Jack's financial
statements.
II. Show how the discount would be unwound.
Solution:
I. Cost of investment $
Deferred cash (at present value) 18m
24m × $1 × 0.75
Share exchange 24m × 2/3 × $2 32m
50m
$50m is the cost of investment for the purposes of the calculation of goodwill.
Journals in Jack's individual accounts:

Dr Cost of investment in subsidiary $50m

Cr Non-current liabilities – deferred consideration $18m
Cr Share capital (16 million shares issued × $1 $16m
nominal value)
Cr Share premium (16 million shares issued × $1 $16m
premium element)

II. Unwinding the discount

Initial liability of $18m × 10% = $1.8m

Dr Finance cost $1.8m
Cr Non-current liabilities – deferred $1.8m
consideration
For the next three years the discount will be unwound, taking the interest to finance cost until
the full $24 million payment is made in Year 3.

Test your understanding 4

Cost of investment
The statements of financial position of P and S as at 30 June 20X8 are given below:
P S
$ $
Property, plant & equipment 15,000 9,500
Investments 5,000

Current assets 7,500 5,000

27,500 14,500

Share capital $1 6,000 5,000

Share premium 4,000
Retained earnings 12,500 7,200
 22,500 12,200
Non-current liabilities 1,000 500
Current liabilities 4,000 1,800
27,500 14,500

P acquired 60% of S on 1 July 20X7 when the retained earnings of S were $5,800. P paid $5,000
in cash. P also issued 2 $1 shares for every 5 acquired in S and agreed to pay a further $2,000 in
3 years' time. The market value of P’s shares at 1 July 20X7 was $1.80. P has only recorded the
cash paid in respect of the investment in S. Current interest rates are 6%.
The P group uses the fair value method to value the non-controlling interest. At the date of
acquisition the fair value of the non-controlling interest was $5,750.
Required:
Prepare the consolidated statement of financial position of P group as at 30 June 20X8.
Solution:
Consolidated statement of financial position as at 30 June 20X8
Non-current assets $
Goodwill (W3) 3,790
Property, plant & equipment (15,000 + 9,500) 24,500
Investments (5,000 – 5,000) -
Current Assets (7,500 + 5,000) 12,500
40,790
Share capital (6,000 + 1,200) 7,200
Share premium (4,000 + 960) 4,960
Retained earnings (W5) 13,239
Non-controlling Interest (W4) 6,310
31,709
Non-current liabilities (1,000 + 500 + 1,680 +101) 3,281
Current liabilities (4,000 + 1,800) 5,800
40,790

Workings
 (W1) Group structure
P

60%
S
1 July 20X7 i.e. 1 yr
(W2) Net assets
Acquisition Reporting date Post-acquisition
$ $ $
Share capital 5,000 5,000 -
Retained earnings 5,800 7,200 1,400
10,800 12,200 1,400

(W3) Goodwill
Parent holding (investment) at fair value
Cash paid 5,000
Share exchange (60% × 5,000 × 2/5 × $1.80) 2,160
Deferred consideration (2,000 × 1/1.063) 1,680
8,840
NCI Value at acquistion 5,750
14,590
Less: Fair value of net assets at acquisition (W2) (10,800)
Goodwill on acquisition 3,790

Shares
P has issued 1,200 shares valued at $1.80 each. These have not yet been recorded and so an
adjustment is required to:
Cr Share capital (1,200 × $1) 1,200
Cr Share premium (1,200 × $0.80) 960

Deferred consideration
P has a liability to pay $2,000 in 3 years’ time which has not yet been recorded. The liability is
being measured at its present value of $1,680 at the date of acquisition and so the adjustment
required is:
 Cr Non-current liabilities $1680

The statement of financial position date is 1 year after the date of acquisition and so the
present value of the liability will have increased by 6% (i.e. it is unwound by 6%) by the
statement of financial position date. An adjustment is therefore required to reflect this
increase:
Dr Finance cost i.e. Retained earnings of P (6% × 1,680) $101
Cr Deferred consideration i.e. Non-current liabilities $101

(W4) Non-controlling interests

NCI value at acquisition (as in (W3)) 5,750
NCI share of post-acquisition reserves 560
(40% × 1,400(W2))
6,310

(W5) Retained earnings

P retained earnings 12,500
Deferred consideration finance cost (101)
S (60% × 1,400 (W2)) 840
13,239

Test your understanding 5

Peppermint acquired 80% of the share capital of Spearmint two years ago, when the reserves of
Spearmint stood at $125,000. Peppermint paid initial cash consideration of $1 million.
Additionally Peppermint issued 200,000 shares with a nominal value of $1 and a market value
at the acquisition date of $1.80. It was also agreed that Peppermint would pay a further
$500,000 in three years’ time. Current interest rates are 10% pa. The appropriate discount
factor for $1 receivable three years from now is 0.75. The shares and deferred consideration
have not yet been recorded.
Below are the statements of financial position of Peppermint and Spearmint as at 31
December 20X4:
Peppermint Spearmint
$000 $000
Non-current assets
 Property, plant & equipment 5,500 1,500
Investment in Spearmint at cost 1,000
Current assets
Inventory 550 100
Receivables 400 200
Cash 200 50
7650 1850
Equity
Share capital 2,000 500
Retained Earnings 1,400 300

Non-current liabilities 3,000 400

Current liabilities 1,250 650
7650 1850

Further information:
1. At acquisition the fair values of Spearmint’s plant exceeded its book value by $200,000.
The plant had a remaining useful life of five years at this date.
2. For many years Spearmint has been selling some of its products under the brand name
of ‘Mintfresh’. At the date of acquisition the directors of Peppermint valued this brand
at $250,000 with a remaining life of 10 years. The brand is not included in Spearmint’s
statement of financial position.
3. The consolidated goodwill has been impaired by $258,000.
4. The Peppermint Group values the non-controlling interest using the fair value method.
At the date of acquisition the fair value of the 20% non-controlling interest was
$380,000.
Prepare the consolidated statement of financial position as at 31 December 20X4.
Solution:
Peppermint: Consolidated statement of financial position at 31 December 20X4
$000
Goodwill (W3) 782
Brand name (250 – 50 (W2)) 200
Property, plant & equipment 7,120
(5,500 + 1,500 + 200 – 80 (W2))
Current assets:
Inventory (550 + 100) 650
Receivables (400 + 200) 600
Cash (200 + 50) 250
9,602
 Share capital (2,000 + 200) 2,200
Share premium (0 + 160) 160
Retained earnings (W5) 1,151
3,511
Non-controlling interest (W4) 337
3,848

Non-current liabilities (3,000 + 400) 3,400

Current liabilities (1,250 + 650) 1,900
Deferred consideration (375 + 79 (W6)) 454
9,602

Workings:
(W1) Group structure
Peppermint
2 years ago 80%

Spearmint

(W2) Net assets of Spearmint

Acquisition Reporting date Post-acquisition
$000 $000 $000
Share capital 500 500 -
Retained earnings 125 300 175
Fair value: Plant 200 200 -
Depreciation adjustment - (80) (80)
(200 × 2/5)
Fair value: Brand 250 250 -
Amortisation adjustment - (50) (50)
(250 × 2/10)
1,075 1,120 45

(W3) Goodwill
Parent holding (investment) at fair value:
 Cash paid 1,000
Share exchange (200 × $1.80) 360
Deferred consideration ($500 × 0.75) 375
1,735
NCI value at acquisition 380
2,115
Less:
Fair value of net assets at acquisition (W2) (1,075)
Goodwill on acquisition 1,040
Impairment (258)
Carrying goodwill 782

Peppermint has not yet recorded the share consideration or the deferred consideration. The
journals required to record these are:
$000
Dr Investment 360
Cr Share capital (200 × $1) 200
Cr Share premium (200 × $0.80) 160
And Dr Investment 375
Cr Deferred consideration 375
The cost of the investment debit is used in the goodwill calculation (W3). The credit entries
need to be recorded on the face of the SFP.
(W4) Non-controlling interest
NCI value at acquisition (as in (W3)) 380
NCI share of post-acquisition reserves (20% × 9
45 (W2))
NCI share of impairment (20% × 258) (52)
337

(W5) Group retained earnings

Peppermint retained earnings 1,400
Unwind discount (W6) (79)
Spearmint (80% × 45) 36
Impairment of goodwill (W3) (80% × 258) (206)
1,151
(W6) Unwinding of discount
Present value of deferred consideration at reporting 454
date (see below)
Present value of deferred consideration at acquisition (375)
79

At acquisition, Peppermint should record a liability of 375, being the present value of the future
cash flow at that date.
The reporting date is two years after acquisition, and therefore the liability in Peppermint’s SFP
at this date is 375 × 1.102.
So, Peppermint needs to:
Dr Retained earnings (Finance costs in SPL) 79
Cr Deferred consideration liability 79

Illustration 3
Post-acquisition revaluations
P has owned 80% of S for many years. During the current year, P and S both revalue their
properties for the first time. Both properties increase by $100,000.
The revaluations will be shown as follows:

$000 $000
Dr Property, plant & equipment 200
Cr Revaluation surplus (via OCI) ($100,000 + (80% × $100,000)) 180
Cr Non-controlling interest (20% × $100,000) 20

Illustration 4
Inter-company current accounts

Current accounts and cash in transit

Draft statements of financial position for Plant and Shrub on 31 March 20X7 are as follows.
 Plant Shrub
$000 $000
Non-current assets
Property, plant & equipment 100 140
Investment in S at cost 180
Current assets
Inventory 30 35
Trade receivables 20 10
Cash 10 05
340 190

Equity and liabilities

Share capital: Ordinary $1 shares 200 100
Share premium 10 30
Retained earnings 40 20
250 150

Non-current liabilities: 10% loan notes 65 -

Current liabilities 25 40
340 190

Notes:
Plant bought 80,000 shares in Shrub in 20X1 when Shrub’s reserves included a share premium
of $30,000 and retained earnings of $5,000.
Plant's records show $6,000 owing to Shrub, but Shrub's records show $8,000 owed by Plant.
The difference is explained as cash in transit. No impairment of goodwill has occurred to date.
Plant uses the proportion of net assets method to value the noncontrolling interest.
Prepare Plant’s consolidated statement of financial position as at 31 March 20X7.
Solution:
Plant Group consolidated statement of financial position as at 31 March 20X7

$000 $000
Assets
Non-current assets:
Intangible assets – goodwill (W3) 72
Property, plant & equipment (100 + 140) 240
312
Current Assets
Inventory (30 + 35)
Trade receivables
(20 + 10 – 2 (CIT) – 6 (inter-co))
Cash (10 + 5 + 2 (CIT))

Equity and liabilities

Share capital
Share premium
Retained earnings (W5)
Non-controlling interest (W4)