Preparing consolidated financial statements

IAS 27 Consolidated and separate financial statements

defines a subsidiary as an entity that is controlled by
another entity. An entity has control if it has the ability to
direct the operating and financial policies of another with a
view to gaining economic benefit. If an entity owns 100% of
another entity it will usually have control.
When preparing consolidated financial statements:
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We are replacing the cost of the investment in the holding entitys accounts with the
fair value of the assets and liabilities of the subsidiary.
Goodwill is likely to arise on acquisition. Shares purchased at the market price may not
reflect the fair value of the assets and liabilities of the subsidiary. Any difference
between the amount paid and the value of the assets is goodwill.
There must be no double counting. All items that relate to transfers within the group
must be eliminated on consolidation.

Pre-acquisition and post-acquisition reserves

When preparing consolidated financial statements it is
important to distinguish between pre-acquisition reserves
and post-acquisition reserves. Pre-acquisition reserves are
retained profits and other reserves that exist in a
subsidiarys statement of financial position at the date of
acquisition. Pre-acquisition reserves are capitalised at the
date of acquisition by including in the goodwill calculation.
They must not be included in the consolidated income
statement or consolidated statement of financial position.
Profits/losses (including unrealised gains and losses) made
after acquisition that are shown in the subsidiary reserves
can be included in the consolidated statement of
comprehensive income and in reserves in the consolidated
statement of financial position.
Intra-group activities
The impact of any intra-group activities must be cancelled
out in the consolidated financial statements.
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2.
3.

Inter-entity trading. Sales and purchases figures need to be adjusted on the income
statement to remove double counting of the sales. Any goods in closing inventory at
the year end will include unrealised profit in the inventory value, this must be removed.
Current accounts should be reconciled, making adjustments for any items in transit
and then cancelled out on consolidation.
Intra/inter-group dividends received are cancelled on consolidation against dividends
paid.

Consolidated financial statements use the same underlying

format as single entity financial statements, so you do not
need to learn new formats for consolidated financial
statements.
Consolidated financial statement preparation checklist

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Calculate group holdings and establish the status of each entity in the question
(subsidiary, associate or investment), W1
Establish fair value of assets acquired and calculate net assets of the subsidiary, W2
Calculate goodwill arising on acquisition, W3
Adjust for any intra-group activities, W4
Calculate balance carried forward on consolidated retained earnings, W5
Calculate balance carried forward on consolidated reserves, W6
Prepare consolidated financial statements, statement of financial position and/or
consolidated statement of comprehensive income.