Chapter 20 Consolidated Income Statement
1.
1.1 1.2 1.3 1.4
Objectives
Prepare a consolidated income statement for a simple group and a non-controlling interest. Account for the effects of intra-group trading in the income statement. Prepare a consolidated income statement for a simple group with an acquisition in the period and non-controlling interest. Account for impairment of goodwill.
* o n s o lid a t e d ncom e + ta te m e n t
B a s ic P r in c ip le s
n tra -g ro u p # r a n s a c tio n s
) id - " e a r A c q u is it io n s
D iv id e n d s
n te re st
! n r e a lis e d P r o f it in n v e n to r"
# ra n sfe r o f $ o n -c u rre n t A ss e ts
m p a ir m e n t of % o o d w ill
& a ir ' a lu e A d (u s t m e n t
$2,-1
2.
2.1
Basic Principles
The mechanics of consolidation #he consolidated income statement follows the following -asic principles. /a0 &rom revenue to profit for the "ear include all of parent compan"1s /P0 income and e penses plus all of subsidiar!"s #S$ income and e penses /reflecting control of +0. /-0 %fter profit for the !ear sho& split of profit -etween amounts attri-uta-le to the parent1s shareholders and the non-controlling interest /to reflect ownership0.
2.2
' ample 1 #he income statements of 2 3td and + 3td for the "ear ended 31 Decem-er 2,1, are given -elow. 2 3td + 3td 4 4 #urnover 3,,5,,, 16,5,,, *ost of sales /12,5,,,0 /7,5,,,0 %ross profit Administrative5 selling and distri-ution e8penses Profit -efore ta8ation #a8ation Profit for the "ear 16,5,,, /9,5,,,0 9,5,,, /145,,,0 :75,,, 12,5,,, /7,5,,,0 7,5,,, /1,5,,,0 ;,5,,,
2 3td acquired 6,< of the ordinar" share capital of + 3td on 1 =anuar" 2,1,. (e)uired* Prepare the consolidated income statement of 2 3td for the "ear ended 31 Decem-er 2,1,. Solution* Consolidated income statement for the !ear ended +1 ,ecember 2010. >or?ings 4 4
$2,-2
#urnover *ost of sales %ross profit Administrative5 selling and distri-ution e8penses Profit -efore ta8 #a8ation Profit for the "ear %ttributable to* %roup /1275,,, A $* 0 $on-controlling interest /;,5,,, 8 2,<0
46,5,,, /16,5,,,0 3,,5,,, /1;,5,,,0 1;,5,,, /245,,,0 1275,,,
/3,,5,,, @ 16,5,,,0 /12,5,,, @ 7,5,,,0
/9,5,,, @ 7,5,,,0 /145,,, @ 1,5,,,0
1175,,, 1,5,,, 1275,,,
+.
#%$ 3.1
Intra-.roup Transactions
,ividends Although it is proper for the holding compan" to ta?e credit of the dividends received and receiva-le from the su-sidiar"5 the inter-compan" dividends do not constitute income of the group and5 thus5 should not -e included in the consolidated income statement. n arriving at the profit attri-uta-le to the group5 the non-controlling interest in the profits of the su-sidiaries is e8cluded. 2ence5 no account needs to -e ta?en of how much of the non-controlling interest is distri-uted as dividends. ' ample 2 #he income statements for 2 3td and + 3td for the "ear ended 31 Decem-er 2,1, are shown -elow. 2 3td acquired :;< of the ordinar" share capital of + 3td several "ears ago. 2 3td + 3td 4,,, 4,,, #urnover 254,, 6,, *ost of sales and e8penses /2517,0 /:2,0 #rading profit nvestment income. Dividend received from + 24, 1.; 6, -
3.2
3.3
$2,-3
Profit -efore ta8 #a8 Profit for the "ear (e)uired*
241.; /11;0 127.;
6, /360 42
Prepare the consolidated income statement of 2 3td for the "ear ended 31 Decem-er 2,1,. Solution* Consolidated income statement for the !ear ended +1 ,ecember 2010. 4 #urnover /254,, @ 6,,0 *ost of sales and e8penses /2517, @ :2,0 Profit -efore ta8 #a8 /11; @ 360 Profit for the "ear %ttributable to* %roup /17: A $* 0 $on-controlling interest /42 8 2;<0 352,, /2566,0 32, /1;30 17:
1;7.; 1,.; 17:
#B$ 3.4 3.;
Interest f there is a loan outstanding -etween group companies the effect of an" loan interest received and paid must -e eliminated from the consolidated income statement. #he relevant amount of interest should -e deducted from .roup investment income and .roup finance costs. /nrealised profit in inventor! f an" goods sold intra-group are included in closing inventor"5 their value must -e ad(usted to the lower of cost and net realiBa-le value /$C'0 to the group.
#C$ 3.7
$2,-4
3.:
#he adjustment for unreali0ed profit should -e shown as an increase to cost of sales /return inventor" -ac? to true cost to group and eliminate unrealiBed profit0.
3.6
' ample + Dn 1 =anuar" 2,1, 2 3td acquired 7,< of the ordinar" shares of + 3td. #he following income statements have -een produced -" 2 3td and + 3td for the "ear ended 31 Decem-er 2,1,. 2 3td + 3td 4,,, 4,,, #urnover 1527, ;2, *ost of sales /42,0 /21,0 %ross profit Distri-ution costs Administration e8penses Profit from operations nvestment income from + 3td Profit -efore ta8ation #a8ation Profit for the "ear 64, /16,0 /12,0 ;4, 37 ;:7 /13,0 447 31, /7,0 /9,0 17, 17, /270 134
During the "ear ended 31 Decem-er 2,1, 2 3td had sold 4645,,, worth of goods to + 3td. #hese goods had cost 2 3td 4;75,,,. Dn 31 Decem-er 2,1, + 3td still had 4375,,, worth of these goods in inventories. (e)uired* Prepare the consolidated income statement of 2 3td for the "ear ended 31 Decem-er 2,1,. Solution* Consolidated income statement for the !ear ended +1 ,ecember 2010. 4,,, 15797
#urnover /1527, @ ;2, A 640
$2,-;
*ost of sales /42, @ 21, A 64 @ 120 %ross profit Distri-ution costs /16, @ 7,0 Administrative e8penses /12, @ 9,0 Profit from operations #a8ation /13, @ 270 Profit for the "ear %ttributable to* %roup /;32 A $* 0 $on-controlling interest /134 8 4,<0
/;;60 15136 /24,0 /21,0 766 /1;70 ;32
4:6.4 ;3.7 ;32
#,$ 3.9
Transfers of non-current assets f one group compan" sells a non-current asset to another group compan"5 the following ad(ustments are needed in the income statement to account for the unrealiBed profit and the additional depreciation. /a0 An" profit or loss arisin. on the transfer must be removed from the consolidated income statement. /-0 #he depreciation char.e must -e adjusted so that it is -ased on the cost of the asset to the group. Impairment of .ood&ill Dnce an" impairment has -een identified during the "ear5 the charge for the "ear will -e passed throu.h the consolidated income statement . #his will usuall" -e through operating e8penses5 however alwa"s follow instructions from the e8aminer. f non-controllin. interests have been valued at fair value 5 a portion of the impairment e pense must -e removed from the non-controllin. interest"s share of profit. 1air values f a depreciating non-current asset of the su-sidiar" has -een revalued as part of a fair value e8ercise when calculating goodwill5 this will result in an ad(ustment to the
#'$ 3.1,
3.11
#1$ 3.12
$2,-7
3.13
consolidated income statement. #he consolidated income statement must include a depreciation char.e based on the fair value of the asset5 e tra depreciation must therefore be calculated and charged to an appropriate cost categor" /usuall" in line with e8aminer requirements0.
3.14
' ample 2 +et out -elow are the draft income statements of 2 3td and its su-sidiar" compan"5 + 3td5 for the "ear ended 31 Decem-er 2,1,. Dn 1 =anuar" 2,,9 2 3td purchased :;5,,, ordinar" shares in + 3td from an issued share capital of 1,,5,,, 41 ordinar" shares. Income statements for the !ear ended +1 ,ecember 2010 2 3td + 3td 4,,, 4,,, #urnover 7,, 3,, *ost of sales /37,0 /14,0 %ross profit Dperating e8penses Profit from operations &inance costs Profit -efore ta8 #a8ation Profit for the "ear #he following additional information is relevant. 1. During the "ear + 3td sold goods to 2 3td for 42,5,,,5 ma?ing a mar?-up of one third. Dnl" 2,< of these goods were sold -efore the end of the "ear5 the rest were still in inventor". %oodwill has -een su-(ect to an impairment review at the end of each "ear since acquisition and the review at the end of this "ear revealed another impairment of 4;5,,,. #he current impairment is to -e recogniBed as an operating cost. 24, /930 14: 14: /;,0 9: 17, /4;0 11; /30 112 /320 6,
2.
$2,-:
3.
4.
At the date of acquisition a fair value ad(ustment was made and this has resulted in an additional depreciation charge for the current "ear of 41;5,,,. t is group polic" that all depreciation is charged to cost of sales. 2 3td values the non-controlling interests using the fair value method.
(e)uired* Prepare the consolidated income statement of 2 3td for the "ear ended 31 Decem-er 2,1,. Solution* Consolidated income statement for the !ear ended +1 ,ecember 2010. 4,,, #urnover /7,, @ 3,, A 2,0 66, *ost of sales /37, @ 14, A 2, @ 4 @ 1; /fair value depn00 /4990 %ross profit Dperating e8penses /93 @ 4; @ ; /impairment00 Profit from operations &inance costs Profit -efore ta8 #a8 /;, @ 320 Profit for the "ear Attri-uta-le to. %roup /176 A 1:.:;0 $on-controlling interest />20 361 /1430 236 /30 23; /620 1;3
139 14 1;3
>1 !nrealised profit in inventor" E 6,< 8 42, 8 33F133 >2 $on-controlling interest $* share of su-sidiar"1s profit for the "ear /46, 8 2;<0 3ess. $* share of unrealiBed profit /2;< 8 440 $* share of impairment /2;< 8 4;0
4,,, 4 4,,, 2, /1.,,0 /1.2;0
$2,-6
$* share of fair value depreciation /2;< 8 41;0
/3.:;0 14.,,
2. 4.1
3id-!ear %c)uisitions f a su-sidiar" is acquired part wa" through the "ear5 then the su-sidiar"1s results should onl" -e consolidated from the date of acquisition5 i.e. the date on which control is o-tained. Treatment of mid-!ear ac)uisition n practice this will require. /a0 dentification of the net assets of + at the date of acquisition in order to calculate goodwill. /-0 #ime apportionment of the results of + in the "ear of acquisition. &or this purpose5 unless indicated otherwise5 assume that revenue and e8penses accrue evenl". /c0 After time-apportioning +1s results5 deduction of post acquisition intra-group items as normal.
4.2
4.3
' ample 4 #he following income statements were prepared for the "ear ended 31 )arch 2,11. Income statements for the !ear ended +1 3arch 2011 2 3td + 3td 4,,, 4,,, #urnover 3,357,, 21:5:,, *ost of sales /14356,,0 /1,252,,0 %ross profit 1;956,, 11;5;,,
$2,-9
Dperating e8penses Profit from operations nvestment income Profit -efore ta8 #a8ation Profit for the "ear
/:152,,0 6657,, 256,, 9154,, /4752,,0 4;52,,
/;153,,0 7452,, 152,, 7;54,, /3257,,0 3256,,
Dn 3, $ovem-er 2,11 2 3td acquired :;< of the issued ordinar" capital of + 3td. $o dividends were paid -" either compan" during the "ear. #he investment income is from quoted investments and has -een correctl" accounted for. #he profits of -oth companies are deemed to accrue evenl" over the "ear. (e)uired* Prepare the consolidated income statement of 2 3td for the "ear ended 31 )arch 2,1,. Solution* Consolidated income statement for the !ear ended +1 3arch 2011. 4,,, #urnover /3,357,, @ /21:5:,, 8 4F1200 3:7517: *ost of sales /14356,, @ /1,252,, 8 4F1200 /1::567:0 %ross profit Dperating e8penses /:152,, @ /;153,, 8 4F1200 Profit from operations nvestment income /256,, @ /152,, 8 4F1200 Profit -efore ta8 #a8 /4752,, @ /3257,, 8 4F1200 Profit for the "ear Attri-uta-le to. %roup /;75133 A $* 0 $on-controlling interest /2;< 8 /3256,, 8 4F1200 19653,, /6653,,0 11,5,,, 352,, 11352,, /;:5,7:0 ;75133
;354,, 25:33 ;75133
$2,-1,
$2,-11
' amination St!le 5uestions
5uestion 1 %iven -elow are the income statements for 2 3td and its su-sidiar" + 3td for the "ear ended 31 Decem-er 2,1,. 2 3td + 3td 4,,, 4,,, #urnover 352,, 25;7, *ost of sales /252,,0 /1546,0 %ross profit Distri-ution costs Administrative e8penses Profit from operations nvestment income Profit -efore ta8 #a8ation Profit for the "ear %dditional information* 1. 2. 2 3td paid 41.; million on 31 Decem-er 2,,7 for 6,< of + 3td1s 6,,5,,, ordinar" shares. %oodwill impairments at 1 =anuar" 2,1, amounted to 41;25,,,. A further impairment of 44,5,,, was found to -e necessar" at the "ear end. mpairments are included within administrative e8penses. 2 3td made sales to + 3td5 at a selling price of 47,,5,,, during the "ear. $ot all of the goods had -een sold e8ternall" -" the "ear end. #he profit element included in + 3td1s closing inventor" was 43,5,,,. &air value depreciation for the current "ear amounted to 41,5,,,. All depreciation should -e charged to cost of sales. + 3td paid an interim dividend during the "ear of 42,,5,,,. 2 3td values the non-controlling interests using the fair value method. 15,,, /17,0 /4,,0 44, 17, 7,, /4,,0 2,, 15,6, /12,0 /6,0 66, 66, /46,0 4,,
3.
4. ;. 7.
(e)uired* Prepare a consolidated income statement for the "ear ended 31 Decem-er 2,1, for the 2 %roup.
$2,-12
5uestion 2 2 -ought :,< of + on 1 =ul" 2,1,. #he following are the income statements of 2 and + for the "ear ended 31 )arch 2,11. 2 3td + 3td 4 4 Cevenue 3152,, 1,54,, *ost of sales /1:56,,0 /;57,,0 %ross profit Dperating e8penses Profit from operations nvestment income Profit -efore ta8 #a8 Profit for the "ear #he following information is availa-le. 1. Dn 1 =ul" 2,1,5 an item of plant in the -oo?s of + had a fair value of 4;5,,, in e8cess of its carr"ing value. At this time5 the plant had a remaining life of 1, "ears. Depreciation is charged to costs of sales. During the post-acquisition period + sold goods to P for 4454,,. Df this amount5 4;,, was included in the inventor" of 2 at the "ear-end. + earns a 3;< margin on its sales. %oodwill amounting to 46,, arose on the acquisition of +5 which had -een measured using the fair value method. %oodwill is to -e impaired -" 1,< at the "ear-end. mpairment losses should -e charged to operating e8penses. + paid a dividend of 4;,, on 1 =anuar" 2,11. 1354,, /65;,,0 459,, 25,,, 759,, /251,,0 456,, 456,, /352,,0 157,, 157,, /;,,0 151,,
2. 3.
4.
(e)uired* Prepare the consolidated income statement for the "ear ended 31 )arch 2,11.
$2,-13
