LESSON 4 CONSOLIDATED FINANCIAL STATEMENTS

GROUP ACCOUNTS.

Key words
1. Control
For the purpose of IAS 27, control is the power to govern the financial and
operating policies of an enterprise so as to obtain benefits from the
activities.

2. A subsidiary Company.
It is an enterprise that is controlled by another enterprise (known as the
parent Company)

3. Parent Company
It is an enterprise that has one or more subsidiaries (sublunary companies)

4. A group.
A group is a parent company and its subsidiaries.

5. Consolidate financial statements

These are financial statements stats of a group prepared like those of a
single enterprise.

6. Minority Interest
A partly owned subsidiary is one in which the parent company does not
hold all the shares the interests of such share holder outside the group is
called minority interest.
Such acquisitions and combination has been due to a variety of economic
reasons such as reducing costs through large operations, control
through diversification etc.
Formation of a parent company (The group)
Is the one deliveries for achieving those objectives.

A parent company. is defined as a company which control one or more co. by means
of holding share in that co. or companies or by having any other country e.g power to
appoint directly or indirectly the majority of the directors at those co. s’

The acquired company is called a subsidiary

A company is said to be a subsidiary of another in any of the following ways

a) The other company holds more than 50% of the nominal shares of other co.
b) The company controls the composition of board directors of subsidiary.
c) A subsidiary / Subsidiaries can be fully or partly owned
The fully owned subsidiary is the one in which all the shares are owned by the
parent company.
(X Ltd owning 100% of Y Ltd) shares
A partly owned subsidiary is the one in which the parent company does not hold
all the shares. The interest of such share holders outside the group is called
minority interest
The 50% of X Ltd bought in Y Ltd, the remaining 20% is the minority is the
minority interest.

When under 2 or more companies are in the relationship of parent and subsidiary
undertakings, then a group is said to exist
When say a group exists, then besides the final accounts of the parent
undertakings. There must be a set of Financial statements prepared in respect of
the group.

These group accounts are known as consolidated financial statement

(A combination of accounts of X Ltd and Y Ltd)

 Consolidation in this case therefore has something to do with investments

 A company must have investment for consolidation to take place.

The purpose of consolidation

To generate Financial statements to present in the annual general meeting accounts of

the present company of the parent co. for the share holders benefits.

To access the operating efficiency of the group of companies with a view to identify
the subsidiaries to dispose off

(Accessing the performance of the companies and finding out the one doing poor so
that you dispose it off)

To establish the wealthy status of the group (your A, L, SHE)

To provide a better assessment of the performance of the parent company’s directors.

Consolidation Principles

An element of investments must exist.

Company must have more than 50% of the ordinary share capital of the subsidiary
company.

Like items on the same side are added. Its asset to assets and liabilities to liabilities.
The significant exception is that of capital.

A subsidiary does not own capital in a group.

The element “investments” appearing in the balance sheet of the parent company.
must be cancelled against the share capital and reserves in the subsidiary co.

Parent Subsidiary
X LTD Y LTD X Group of companies

ii) F.A 10m 10m 20m

Investment in Y 14

Investment reasonable 4m 6m
ii) Interest payable
iii) And share K 20m 10m 20m
iv) Retain 10 4m 10m

The parent company buys equity in the subsidiary co.

i) All inter-company transactions must also be cancelled out eg interest
receivable in one company is interest payable in another company.

ii) The inter company indebtedness must be cancelled also

(if X Ltd has a loan in X Ltd, Y will be a debtor

iii) If the closing stock within one company had been deducted from another with
in a group then eliminate the un released profits from the stock value.
Received the profits margin from the stock at company).
This is consistent with historical cost convention that taking stock at historical
costs.

iv) If the consideration value (fair value) paid for the equity in the subsidiary is
Greater than the net asset value of the subsidiary, then good will arise.
i.e Total equity = Net assets of company.
For Y LTD 35 > Net assets (30)
The good will is recorded and included in the group Accounts
 Positive good will should be recorded as an asset
Negative good will should be recorded as capital reserve.

iv) If the parent co. acquires less than 100% equity of another co. then the
minority interest must be reported in the consolidated balance sheet

Preparation of consolidated accounts.

Illustration
On 1st/ 01 /2000, Masters Ltd acquired 100% of the share capital 10,000 and
reserves of 4,000 in Bachelor’s Ltd for 15,000 and gained control.
The fair value of the Net assets of Bachelor’s at the date of acquisition was as
follows;

Masters ltd 100% Bachelor ltd

Non current asset 20,000 11,000

Investment in Bachelors 15,000 ______

Net Assets 8,000 3,000

Total Assets 43,000 14,000

Financed by share Capital

Ordinary Share Capital 16,000 10,000
Retained profits 27,000 4,000
43,000 14,000
Required;
a) Calculate the good will at the acquisition date.
b) Construct the consolidated Financial Statements.

a)
Good will

Amount paid = 15,000

Net Assets B. Ltd = 14,000

15,000 > 14,000

Good will = 15,000-14,000

=1,000 hence must be recorded as an
asset
 Good will

Amount paid 15,000

Less: Net Assets B ltd 14,000
Good will 1,000

b)

Masters ltd Bachelors 100% Masters Group of

Cos
Non-current assets 20,000 11,000 31,000
Good will _______ ______ 1,000
Investment in B ltd 15,000 ______ _____
Net Assets 8,000 3,000 11,000
Total Assets 43,000 14,000 43,000

Ordinary B Capital 16,000 10,000 16,000

Received Profits 27,000 4,000 27,000
43,000 14,000 43,000
OTHER MECHANICS / PRINCIPLES OF CONSOL IDATION
 Add on a line by line basis like items (SFP)
Except the following:
a). Eliminate contras (intes company items)
b). Eliminate profit loading (unrealized TTs on trading among Coss
c). include goodwill
d). non controlling interests (NC1) or minority interest
e). fair value adjustment
pj 210 – 216

Workings
West a group structure
P A = OE+L
%
80 A -L = OE
s
Control NA = OE
S

W2 NA summary of a subsidiary
A+ aqn A+ Consln
Ordinary share K xx xx
Reserves xx xx
Retained Earnings xx xx
Fair value xx xx
Xx xx

W3 compute purchase consideration (PC)

Cash xx
FV of shares xx
Other (F.V) xx
xx

Deferred consdn reabn to discount.

W4 Goodwill Computation
( Proportion of net Asset method)
 Fair value of PC (W3) xx
Less share of the fair value of
The NA at aqn (W2) xx
Goodwill arising an aqn xx
Less impairment to date (xx)
Goodwill c/d xx

Full goodwill method

F.V of purchase (W3) xx
Less
Parents share of NA at aqn (W2) (xx)
Parents share of goodwill xx
Fv of NC 1 at acqn
Less
Share of NA at acqn (W2) (xx)
NCI share of goodwill xx
Less xx
Imparements to date (xx)
Goodwill c/d xx

W5 Computation of NC I
% of NA at consolidation (W2)xx

New method
% of NA at consolidation (W2)xx
Add
Share of goodwill W4) xx

N6 Computation of group retained earnings

All of plant xx
Add
Group’s share of post
Acqn RE of the subsidiary xx
Groups share of post
Acqn RE of the Associate xx
Less
Profit loading on inventory (xx)
Impairment of goodwill (xx)
 Interest on deferred
Consolidation (xx)
Professional fees (x)
xx

Other reserves
a/c of P xx
Add
Post aqn share of the sub xx
Xx

W7 investment in the associate or NA x % of control xx

Cost xx add
Add premium on aqn xx
Group’s share of post aqn TTs of goodwill (see below)
The associate xx xx
Less
Impairment A/w of the associate (xx) premium on aqn
Xx cost of investment (PC) xx
Share of NA at aqn (xx)
C/w arising xx
Less
Impairment (xx)
Premium c/d xx

Pg 16 216 (Ex1
218 (Dkns & jones

Dr. retained earnings

Cr. Consolidated inventory

Example:
During the Ys ended 31st December 2011 subsidiary sold goods to parent for 2.7m subsidiary
had maked up these goods by 50% of cost. Parent had 1/3 of these goods still in inventory as at
31st December 2011.
Required
Compute TT loading on inventory if any and show the journal to record.
Solution:
 1 2700,000
3

1 x 50 x 2700,000)
3 150
= 300,00

During a certain years S sold goods to P at a setting Px of 140,000 which gave S a TT of 40% on
cost P had half of his goods in inventory at the Yr end. P owns S to the extent of 80%.
Compute unrealized TT and hence journals to record
Solution
40 x 140,00) x ½
140

= 40,000 x ½
= 20,000.

TT loading on inventory
Dv consolidated RE ( 20 x 80%) = 16
Dv NCI (20 x 20%) = 4
Cr consolidated inventory = 20

TT loading
Dr RE 20m
Cr ware house 20m
Dr accumulated depreciation 2m
Cr RE 2m
Given 5om 10m
Gross provision (70 – 50 ) 20
Less
Excess depreciation (7 – 5) (2)
Net provision 18

Dr. consolidated refined Eqn 18

Cr ware house 18

Treatment of goodwill
Marketable securities = market prices
Securities traded on Active markets
Non marketable securities
Look for the Price of a comparative company prices (pure play)

Tangible NCA = market price

Long term receivables = present value of the amounts expected to be received.
Long term payables = present value of the amounts expected to be paid.

Inventory
a). Raw material inventory ( fair value replacement cost
b). Wip inventory = SPx – costs to sale + completion cost + TT allowed.
c). Finished goods inventory SPx – costs to select TT allowed.

Example
Company A aquires 24m ushs 1 s shares of the ordinary shares of another company B by
offering a share for share exchange of 2 company A shares for eaasy 3 shares acquired in
company in B and a cash payment of ushs 1 per share payable 3 years later. A current market
value of company A shares is 2.
Current interest rates are 10% and best on this, the present value of ushs 1 in 3 years time is
0.751.

Computation:
 The cost of investment and show the journals to record.
 Be sure to show how the discount will be un worried.

Solution
PC can be computed as follows:
a). Shares = 2 x 24m x 2 = 32m
3

b). Cash (24m x 1 x 0.751) = 18m

50m
Journal
Dr. Cost of investment 50m
Cr. Share capital 16m
 Cr. Share premium 16m
Cr. Non current liability 18m

Interest charged on outstanding amount

1. 18m x 10% = 1.8m
Dr. Income statement 1.8m
Cr. NCL 1.8m

2. 19.8 x 10% = 1.98m

Dr. Ys 1.98m
Cr. NCL 1.98
3 21.78 x 10% = 2.178
Dr. Ys 21.78
Cr. NCL 2.178
J 1
Exercise 1 – 7
Solution W1 group structure
P and group consolidation SFP as at 31/12 2004 the acquisition of 80% equity shares is likely
Assets “no” to give paze inut control over seppermint
Non current Assets (5500 + 1500 – 36 + 120) 7084
Therefore
Goodwill (W5 1033 P
80% group
S NCL = 20%
N2 URP on inventory
1800 = (270,000 x 25 x 1)
125 3
Receivables ( 400 + 200 – 75 525 Dr. Re 18000 x 80%) = 14400
Inventory (550 + 100 – 18 + 400) 1032 Dr. NCL (18000 x 20% = 3600
Cash (200 + 50) 250 Cr. Consolidation inventory = 18000
Equity and liabilies 9924 URP on NCA
Share capital (2000 + 200 2200 gross production(240000 – 200,000 – 40000
(180 – 1X less
Share premium 160 200,000 excess depreciation 4000
Retained carrying 1112 – 6 Asset provn 36000
NCT (W6) 343.4 Dr. RE 38000
Cr. Cons NCA 36000
Reffered consolidatin (376 + 79) 455 W3 treatment of timber sale
Loan payable (W3 428 . pase int has transferred the risk
Non current liabilities (3000 + 400) 3400 of ownership timber and the transaction
Current liabilities (1250 + 650 – 75) 1825 is a financing.
Total EL 9924 . pazeint had in fact borrowed on the

Security of the timber, this timber will there

Fore appear as inventory on the balance
Sheet and the loan will appear as a liability.
. the question is what the carrying value of
This liability.
IAS 39 requires that liabilities other than
those held for trading are carried at their
amortized cost using the effective interest
rate in list.
This means that the carrying value of the
Liability will be increased by the interest
Change that is inherent in the contract and
Reduced by any cash flows (although in this
Case there are non.
Each Yr there will be an interest element
Charged with the Ys and added to the
Liability.
Effective initiate can then be computed
Total repayments 561000
Amount borrowed 400,000
961000

This must be spread to the incomes using

the
Effective rate and is calculated as the IRR
Of the lncomes follows

5 561000 – 1
400000
= 0.07 on 7%
So the Ys of pazeint should show interest
payable 7% x 400,000 = 28000 meaning
that the bs at 31 dec 2004 will show
inventory at 400,000 and loan repayable
after more than 1 Yr of 428000.
W4 Net assets summary
At aquisition At b/sheet
Ordinary SK 500 500
Retained earnings 125 300
F. value adjustment 200 120
825 920
W5 computation of goodwill
PC
Cash 1000000
Shares 360
Deffered consolidation 376 1736
80% x 825 (660)

Parents share of a/w 1076

FV of NCI 380
For (20% x 825 (165)
NCTT share of a/w 215
Goodwill 1291
Less
Impairment 258
Goodwill c/d 1033
W6 computation of NCI
20% 920 184
Imparement (258% x 20% (52)
URP (36)
Share of fw 215

W7 cond RE
AII of P 1400
Post acquisition share of September 76
URP on inventory (14.4)
URP on plant (36)
Loan interest (28)
Impairment a/w (258 x 80%) (206)
Un winding interest (79)
 Un winding interest 376 x (1+0.1)2 = 455
= 455 – 376.79
Ps 287 Pg 286 note 5
Activity
W1 Establishment of group structure

Kampala
80% 60% NCI in Kawempe = 40%
Lubaga kawempe NCI in Lubaga = 20%
132000 + ½ < 54000

W2 Computation of Net Assets summary

Lubaga kawempe
A+ a qn A+ b/v A+ aqn A+ b/s
Ordinary shares 100,000 100,000 400,000 400,000
RE 19400 22400 157000 186000
Pre aqn dividends 12000
119400 122400 571000 586000

W3 Computation of goodwill
Lubaga KAwempe
Purchase consideration 153000 504000
For 80% x 119400 (95520)
For 60% x 511000
57480 161400
Total goodwill (57480 + 161400 = 218880

Kampala and Group Consolidated b/s as at 31/12/11

Free hold property (116 + 200 - - 40 267000
Plant and machinery (216 + 104 + 326.4 – 87 – 39 – 124.6) 395800
Goodwill (W3 218880
Trade investment 52000
Convent Assets
Inventory (W4) 599240
Debtors (172.2 + 73 + 95 3402000
Bank balance (7.9 + 62.8 + 1.7) 72400
Cash (1.1 + 0.2 + 1.2 3000
 1948520
Equity and liabilities
Ordinary share capital 750,000
Share premium 15000
Retained TTs (W5) 264640
NCI (W6) 271480
Creditors (162 + 74.4 + 49) 385400
Bank of draft 74000
Taxation (78 + 24 + 56) 158000
Proposal dividends 30,000

W4 Inventory
Kampala per qn 206000 Lubaga per qn 99000
Sales = 1400,000 1000 Kawempe 294200
1.4 items in transit ( 1200 ) 960
Purchases (820) (1.25)
Sle or return (650) 500 206680 URP in inventory (1600)
1.30 599240

W5, Retained Earnings.

All of Kampala 228000
Normal sales 100
Sale or return 500
Purchaser (820)
Group share of post aqn dividends
Lubaga (15000 x 80%) 12000
Kawempe (2400/2 x 60%) 7200
Group share of post aqn_ profits
Lubaga (3800 x 80%) 2400
Kawempe (54000/2 x 60%) 16200
Un realized inventory ( 240 + 1600) (1840)
264640
W6: Computation of NCI

Lubaga Kawempe
For 80% of 122400 24480
60% of 58600 234400
Dividends 20% x 15000 3000
40% x 24000
27480 9600
Total (27480 + 244000) = 271480. 2466000

C Dic with Lubaga

Bal b/d 12700 Cash in transit 1700
In via 1200
Bal ad
12700 12700

C.A with kampala

b/d ad 9800 Bd b/d 9800

Pg 288, Activity 3 A and Group consolidated Financial

Interest in 5 = 18000 = 60% Position as gd a 12000
30,000 fixed Assets (300,000 + 100,000) 400,000
Good will 1500
Interest in 9 = 18000 = 30% investment in Associate 5000
60,000 net current Assets (345 + 160) 505000
H Total Assets 971000
60% 30% order share K 250,000
S 1 P & L (400,000 + (180000 – 70000) x 0.6
9 + (100000 – 30000) x 30%)))) 487000
NCI 84000
Long term liabilities (100,000 + 50,000) 15000
Good will Total Equity and liabilities 971000

P construction 75000
For 60% (30,000 + 70,000) (60,000)
15000

Investment Associate
Cost 30,000
Post qn share
(100,000 – 30,000) x 30% 21000
 51000
(240,000 – 80,000) x 30% 48000
Add
Premium qn
Pc 30,000
For 60, 000 + 30,000) x 30% (27000) = 30,000
51000
Pge 245 control and ownership
P S Adj Cons
Sales revenue 3200 2560 (600) 5160
Cost of sales (2200) (1480) 570 (3110)
Gross profit 1000 1080 (30) 2050
Investment Y
Adtve expencies 1400 80 30) (518)
Profit before tax 1252
Amount attributable to
Equity holders of the point 292
NCI (20% of s’s Ti of tax 80

GROUP ACCOUNTS Cont..

Illustration

P Ltd acquired controlling interest in 2 Companies, S1 and S2 Ltd as follows:

P Ltd S1 Ltd S2 Ltd

Investments
S1 Ltd 60,000 0 0
S2 Ltd 80,000 0 0
Net Assets 160,000 70,000 120,000
Total Assets 300,000 70,000 120,000

Financed by:
Ordinary Share Capital 200,000 50,000 80,000
Reserves 100,000 20,000 40,000
300,000 70,000 120,000

Assuming that P acquired 60% of S1 and 75% of S2 Ltd, Prepare

Statement of consolidation at the date of purchase.

Step 1
Goodwill Computation
S1 Ltd
Amount paid 60,000
Less Net Assets in S1 Ltd
(where 60% of 70,000) 42,000
Goodwill 18,000
Recorded under assets
S2 Ltd
Amount paid 80,000
Less Net Assets in S1 Ltd
(where75% of 120,000) 90,000
Goodwill -10,000
Recorded under reserves

Goodwill = 18,000+(10,000) = 8,000

As an asset

Note: The positive or negative goodwill must be combined in the Goodwill

account to become 8,000/- which is an asset.

Step 2 preparation of Consolidated Financial

statements

P Group of Companies
Consolidated Financial statements as at 30th June
2012
Shs Shs
Net Assets:
P Ltd 160,000

S1 Ltd 70,000

S2 Ltd 120,000

Total Assets 350,000

Goodwill 8,000
Total Assets 358,000

Financed by:
Share capital (P Ltd) 200,000

Reserves (P Ltd) 100,000 300,000

Minority Interest
S1 Ltd 40% of 70,000 28,000

S2 Ltd 25% of 120,000 30,000 58,000

358,000

X Ltd acquired 100% equity of Y Ltd on 30 th june 2004. At the time acquisition,
the ordinary Share capital and reserves of Y ltd were shs 100,000,000 and
12,000,000 respectively. The equity investment of X ltd in Y Ltd was shs
125,000,000/-. The balance sheet of the two companies as at 30/06/2004 were
as follows:

X Ltd Y Ltd
000 000
Fixed Assets 300,000 80,000
Investment in Y Ltd 125,000
Stock 80,000 25,000
Debtors 55,000 30,000
Bank 30,000 4,000
Total assets 590,000 139,000

Creditors 35,000 14,000

Ordinary Shares(1000
each) 400,000 100,000
Reserves 155,000 25,000
590,000 139,000
Additional Information

1. As at the balance sheet date, Y Ltd is debtor to X Ltd for 13,000,000/-

2. included in inventory of X Ltd are goods worth 30,000,000/-which were acquired from Y
Ltd at 30% cost plus a margin .

Required: Prepare the Consolidated Balance sheet for the group as at 30th June 2005.

1. Step 1- Determine minority interest – No MI it was 100% acquisition

Step 2 –Determine Good will at the acquisition date.

Y Ltd
Share Capital 100,000,000
Reserves 12,000,000
Net Assets 112,000,000

X Ltd 's Investment in Y Ltd 125,000,000

Less Net Assets 112,000,000
Goodwill 13,000,000

2. Debtor and Creditor

Invoices amount (margin) is cancelled. So reconcile the inter company indebtedness

X Ltd Y Ltd
55000 + 30,000- 13,000=
Debtors 72,000
35000 + 14,000 - 13,000 =
Creditors 36,000

Step 3

Stock value 30 m(cost price +profit)

Selling policy = 30%

let cost price be x

selling price = cost +profit

let cost price = x

selling price = cost +profit

30m =x +30% x

30 m X
=X
1.3

x = 23.1 m

x Ltd Y Ltd

Stock 80 + 25 - 6.9 = 98.1

Stock = 30

Cost = 23.1

Un realized profit 6.9

Step 4 Reserves

Pre- acquisition reserves (12,000,000/-) at the time of acquisition are used to calculate goodwill
or capital reserve.

The opposite of Goodwill is capital reserve

Post acquisition reserves (25,000,000/-) are the accumulated reserves after acquisition.

Post acquisition reserves together with present balance in the Balance sheet on the parent
Company reserves are transferred to the consolidated accumulated reserves.

Step 5 Reconciling investments in subsidiary with the equity by the parent company in the
subsidiary at the date of consolidation

To Equity Subsidiary (Shares 100+25 reserves) = 125

Less : Net Assets at acquisition date (112) (100&12)

13
 : Un realized profits (6.9)

Reserve Balance in Subsidiary 6.1

Add: Total Equity on parent Co.(400shares+155reserves) 555

To consolidated balance sheet 561.1

Step 6 Preparation of Consolidated Balance sheet

X GROUP OF COMPANIES
CONSOLIDATED BALANCE SHEET AS AT 31.06.2005
Shs
Fixed assets (300+80) 380
Good will (S2) 13
Stock (S3) 98.1
Debtors(S4) 72
Bank(30+4) 34
597.1

Equity and Liabilities

Share Capital 400
Reserves (155+6.1) 161.1
Creditors 36
597.1