Professional Documents
Culture Documents
Intragroup trading
Sales and purchases
The effect of intragroup trading must be eliminated from the consolidated statement of profit
or loss. Such trading will be included in the sales revenue of one Group Company and the
purchases of another.
➢ Consolidated sales revenue = P’s revenue + S’s revenue – intragroup sales.
➢ Consolidated cost of sales = P’s COS + S’s COS – intragroup sales.
Interest
If there is a loan outstanding between group companies the effect of any loan interest received
and paid must be eliminated from the consolidated statement of profit or loss.
The relevant amount of interest should be deducted from group investment income and group
finance costs.
If there is a mid-year acquisition, you must be careful with the finance costs, as it may be that
the finance costs include interest on a loan from the parent which has only occurred in the
second half of the year.
For example, if the subsidiary's finance costs were $400,000 and the parent has owned the
subsidiary for six months, the finance costs to be consolidated would normally be $200,000.
However, if the parent loaned the subsidiary $2m with 10% interest, there will be $100,000 in
the second six months that wouldn't be in the first six months.
The true interest charge would be $300,000 without the intragroup interest, and therefore six
months of this would be $150,000. This is the figure that would be included within the
consolidated statement of profit or loss.
Dividends
A payment of a dividend by S to P will need to be cancelled. The effect of this on the
consolidated statement of profit or loss is:
➢ Only dividends paid by P to its own shareholders appear in the consolidated financial
statements. These are shown within the consolidated statement of changes in equity
which you will not be required to prepare for the Advanced Financial Accounting
examination.
➢ Any dividend income shown in the consolidated statement of profit or loss must arise
from investments other than those in subsidiaries or associates (covered in chapter 4).
Prepare Paddle’s consolidated statement of profit or loss for the year ended 31 August
20X4.
Solution
Paddle consolidated statement of profit or loss for the year ended 31 August 20X4
$000
Revenue (2,400 + 800) 3,200
Cost of sales and expenses (2,160 + 720) (2,800)
––––––
Profit before tax 320
Income tax expense (115 + 40) (155)
––––––
Profit for the year 165
––––––
Profit attributable to:
Owners of parent (165 – NCI) 155
Non-controlling interest (W1) 10
Note that B's cost of sales is nil since the goods are still held at the year end, hence they do not
qualify as 'cost of sales'. The $20 is the unrealised profit whose cancellation in the SFP was
discussed in the last chapter. In the statement of profit or loss, we must
(1) Eliminate sales of $80 in A's books and purchases of $80 in B's books
(2) Cancel the unrealised profit of $20 in A (the seller's) books.
If B had sold the item for $95 by the reporting date, the statements of profit or loss of the two
companies would have shown:
Both companies would have realised their profits and so these should not be adjusted. However,
a single equivalent company would show in its statement of profit or loss:
In this case, we need eliminate only the $80 from sales revenue and the $80 from cost of sales
in order to establish the correct revenue and cost of sales figures. No adjustment would be
required for unrealised profit since all profits are now realised.
To achieve this, in the first instance all the unrealised profit must be eliminated to determine
the correct amount of gross profit earned by the group trading as if it were a single entity. Then
the NCI’s share is calculated by reference to the reduced amount of the subsidiary's post-tax
profits. PURP is added in to cost of sales and remove NCI share in the NCI working.
If, however the seller makes a profit on the sale, the buyer will account for the asset at a value
higher than the depreciated cost to the group. The profit made by the seller is gradually realised
over the asset’s remaining life by the buyer’s depreciation charges being calculated on a value
higher than original cost to the group. So at the time when the buyer has fully depreciated the
acquired asset, the whole of the seller’s profit has been realised and no adjustments are
necessary.
However, as long as the buyer is still depreciating the acquired asset, the amount of the seller’s
unrealised profit must be eliminated from both earnings and the carrying amount of the asset.
Adjustments are needed in order to return to the situation if the sale had not taken place:
➢ Any remaining unrealised profit or loss arising on the transfer is eliminated
➢ The asset’s cost and accumulated depreciation are adjusted so that they are based on
the cost of the asset to the group.
Impairment of Goodwill
Once any impairment has been identified during the year, the charge for the year will be passed
through the consolidated statement of profit or loss. This will usually be through operating
expenses, however always follow instructions from the examiner.
If non-controlling interests have been valued at fair value, a portion of the impairment expense
must be removed from the noncontrolling interest's share of profit.
Fair values
If a depreciating non-current asset of the subsidiary has been revalued as part of a fair value
exercise when calculating goodwill, this will result in an adjustment to the consolidated
statement of profit or loss.
The subsidiary's own statement of profit or loss will include depreciation based on the value
the asset is held at in the subsidiary's own SFP.
The consolidated statement of profit or loss must include a depreciation charge based on the
fair value of the asset, included in the consolidated SFP.
Extra depreciation must therefore be calculated and charged to an appropriate cost category
(usually in line with examiner requirements).
4. Mid-year acquisitions
Mid-year acquisition procedure
If a subsidiary is acquired part way through the year, then the subsidiary’s results should only
be consolidated from the date of acquisition, i.e. the date on which control is obtained.
Prepare the consolidated statement of profit or loss for the year ended 31 March 20X9
for the Ethos group.
Solution
Ethos: Consolidated statement of profit or loss for the year ended 31 March 20X9
$000
Revenue 303,600 + (217,700 × 4/12)) 376,167
Cost of sales (143,800 + (102,200 × 4/12)) (177,867)
–––––––
Gross profit 198,300
Operating expenses (71,200 + (51,300 × 4/12)) (88,300)
–––––––
Profit from operations 110,000
Investment income (2,800 + (1,200 × 4/12)) 3,200
–––––––
Profit before tax 113,200
Income tax expense (46,200 + (32,600 × 4/12)) (57,067)
–––––––
Profit for the year 56,133
–––––––
All profits earned by Pathos in the four months since that date are post-acquisition profits.
The previous eight months’ profit from 1 April 20X8 to 30 November 20X9 are all pre-
acquisition and would be included within the reserves at acquisition for the calculation of
goodwill.
Exercise 1
Pepper bought 70% of Salt on 1 July 20X6. The following are the statements of profit or loss
of Pepper and Salt for the year ended 31 March 20X7:
ii. During the post-acquisition period Salt sold goods to Pepper for $4,400. Of this
amount, $500 was included in the inventory of Pepper at the year-end. Salt earns a
35% margin on its sales.
iii. Goodwill amounting to $800 arose on the acquisition of Salt, which had been
measured using the fair value method. Goodwill is to be impaired by 10% at the year-
end. Impairment losses should be charged to operating expenses.
Required: Prepare the consolidated statement of profit or loss for the year ended 31
March 20X7 for the Pepper group.
Exercise 2
Papilla acquired 70% of Satago three years ago, when Satago’s retained earnings were
$430,000. The financial statements of each company for the year ended 31 March 20X7 are
as follows:
ii. The Papilla group values the non-controlling interest at fair value. The fair value of
the non-controlling interest at the date of acquisition was $250,000. Goodwill has
been impaired by a total of 30% of its value at the reporting date, of which one third
related to the current year.
iii. At the start of the year Papilla transferred a machine to Satago for $15,000. The asset
had a remaining useful life of 3 years at the date of transfer. It had a carrying amount
of $12,000 in the books of Papilla at the date of transfer.
iv. During the year Satago sold some goods to Papilla for $60,000 at a mark-up of 20%.
40% of the goods remained unsold at the yearend.
v. At the year-end, Satago’s books showed a receivables balance of $6,000 as being due
from Papilla. This disagreed with the payables balance of $1,000 in Papilla’s books
due to Papilla having sent a cheque to Satago shortly before the year end which
Satago had not yet received.
Exercise 3
On 1 January 20X4, Plastik acquired 80% of the equity share capital of Subtrak. The
consideration was satisfied by a share exchange of two shares in Plastik for every three
acquired shares in Subtrak. At the date of acquisition, sharesin Plastik and Subtrak had a
market value of $3 and $2.50 each respectively. Plastik will also pay cash consideration of
27.5 cents on 1 January 20X5 for each acquired share in Subtrak. Plastik has a cost of capital
of 10% per annum.
None of the consideration has been recorded by Plastik.
Statements of profit or loss and other comprehensive income for the year ended 30 september
20x4.
Plastik Subtrak
$'000 $'000
Revenue 62,600 30,000
Cost of sales (45,800) (24,000)
Gross profit 16,800 6,000
Distribution costs (2,000) (1,200)
Administrative expenses (3,500) (1,800)
Finance costs (200) –
Profit before tax 11,100 3,000
Income tax expense (3,100) (1,000)
Profit for the year 8,000 2,000
Other comprehensive income:
Gain on revaluation of property 1,500 –
Total comprehensive income 9,500 2,000
Current assets
Inventory (note(ii)) 4,300 1,200
Trade receivables 5,700 2,500
Bank - 300
Total assets 28,700 17,900
Non-current liabilities
10% loan notes (note(ii)) 2,500 1,000
Current liabilities
Trade payables (note(iv)) 3,400 3,600
Bank 1,700 -
Current tax payable 2,800 800
Total equity and liabilities 28,700 17,900
(i) At the date of acquisition, the fair values of Subtrak's assets and liabilities were equal to
their carrying amounts with the exception of Subtrak's property which had a fair value of $4
million above its carrying amount. For consolidation purposes, this led to an increase in
depreciation charges (in cost of sales) of $100,000 in the post-acquisition period to 30
September 20X4. Subtrak has not incorporated the fair value property increase into its entity
financial statements.
The policy of the Plastik group is to revalue all properties to fair value at each year end. On
30 September 20X4, the increase in Plastik's property has already been recorded, however,
a further increase of $600,000 in the value of Subtrak's property since its value at acquisition
and 30 September 20X4 has not been recorded.
(ii) Sales from Plastik to Subtrak throughout the year ended 30 September 20X4 had
consistently been $300,000 per month. Plastik made a mark-up on cost of 25% on all these
sales. $600,000 (at cost to Subtrak) of Subtrak's inventory at 30 September 20X4 had been
supplied by Plastik in the post-acquisition period.
(iii) Plastik's policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose Subtrak's share price at that date can be deemed to be
representative of the fair value of the shares held by the non-controlling interest.
(iv) Due to recent adverse publicity concerning one of Subtrak's major product lines, the
goodwill which arose on the acquisition of Subtrak has been impaired by $500,000 as at 30
September 20X4. Goodwill impairment should be treated as an administrative expense.
(v) Assume, except where indicated otherwise, that all items of income and expenditure
accrue evenly throughout the year.
Required
(a) Calculate the goodwill arising on the acquisition of Subtrak on 1 January 20X4. (4 marks)
(b) Calculate the following amounts for presentation in the consolidated statement of
financial position:
(i) Group retained earnings
(ii) Non-controlling interest (6 marks)
(c) Prepare the consolidated statement of profit or loss and other comprehensive income for
Plastik for the year ended 30 September 20X4. (10 marks)