Session 5: Consolidated Income

Statement

Accounting for Groups:

Consolidated Income
Statement

Session 5
AC2091: Financial Reporting

Learning Outcomes
• prepare consolidated profit and loss or income
statements using the acquisition, equity and
proportional consolidation methods
• appreciate the importance of the transaction
date and the difference between pre and post
transaction profits/income in consolidated
accounts

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 Session 5: Consolidated Income
Statement

Relevant Accounting Standards

o IFRS 3 Business Combinations (revised 2008)
o IFRS 10 Consolidated Financial Statements
(from 2013 onwards)
o IAS 27 Consolidated and Separate Financial
Statements
o IAS 36 Impairment of Assets.
o IAS 38 Intangible Assets

Consolidated Income Statement

• Prepared subsequent to date of acquisition
– drawn up to show the profit or loss of the
companies in the group
– group treated as a single entity
• Line-by-line aggregation of items in books of
parent and subsidiary, making necessary
adjustment for intragroup transactions
– should reflect income earned, and expenses
incurred, from external parties

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 Session 5: Consolidated Income
Statement

Consolidated Income Statement

• If parent acquires < 100% of subsidiary’s
share capital
– items consolidated line by line
– % of parent + % of subsidiary
– part of profit is attributable to non-controlling
shareholders
– profit after tax split into amount attributable to:
• Equity holders of parent; and
• Non-controlling interests

Consolidated Income Statement

• Points to note
– Add parent and subsidiary figures (income and
expenses) up to
– Exclude intra-group transactions from
and
– Adjust for unrealized profits in closing inventory
and cost of sales
– Tax expense = +
– NCI portion of profit after tax deducted to get
profit attributable to equity shareholders

Dr Profit after tax – non-controlling interests

Cr Non-controlling interests 6

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 Session 5: Consolidated Income
Statement

Consolidated Income Statement

• Pre and post acquisition reserves
– Pre-acquisition retained profits are eliminated
during goodwill calculation
– Post-acquisition profit are included in
consolidated accounts
• Intragroup balances/debt
– Receivables & payables balances to be
reduced accordingly (e.g. AR/AP)
– Adjusting entries for cash or goods in transit

Illustration 1: Pre/Post Acq. + NCI

The income statements of P Ltd and S Ltd as at 31 Dec 20X9
are as follows:
Income Statements for year ended 31 Dec 20X9 P Ltd S Ltd
£’000 £’000
Sales 100 70
Cost of Sales 30 20
Gross profit 70 50
Distribution costs 15 10
Administrative costs 10 10
Finance costs 5 5
Profit before tax 40 25
Tax 10 5
Profit after tax 30 20
Dividends 5 0
.Profit for the year 25 20
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 Session 5: Consolidated Income
Statement

Illustration 1: Pre/Post Acq. + NCI

P Ltd acquired 75% of the issued share capital in S Ltd on 31
December 20X8 when the retained earnings of P Ltd and S
Ltd were £80,000 and £30,000 respectively. There were no
intragroup transactions in the year.

Required:
Prepare a consolidated income statement of P Ltd for the
year ended 31 December 20X9.

Intragroup Transactions
• Intragroup sale of inventory
– Consolidated statement should reflect the
performance of the group as a single entity
• Should reflect sale of goods to external parties
– Intragroup sales and purchases are eliminated
from the consolidated statement

Dr Sales
Cr Cost of sales

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 Session 5: Consolidated Income
Statement

Intragroup Transactions
• Intragroup sale of inventory
– Unrealised profits to be eliminated in unsold
inventory (and cost of sales)
– Closing inventory to be valued at cost to the
group, i.e. any unrealised profit is removed from
inventory held by the purchaser
– Portion of unrealised profits
if inventory sold by subsidiary

Dr Cost of sales
Cr Group inventory
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Intragroup Transactions
• Unrealised profit in opening inventory
– Overstatement in opening inventory
– Shift income from the previous period, in which
inventory was still on hand, to the period in which
the inventory is ultimately sold to external parties
– Remove unrealised profit in opening stock

Dr Group retained earnings (opening)

Cr Group inventory (opening) /
Cost of goods sold

12

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 Session 5: Consolidated Income
Statement

Intragroup Transactions
• Intragroup sale of depreciable non-current assets
– Disposing entity recording a profit or loss
• to be eliminated
– Depreciation should be determined based on the
original historical cost of the asset
• Adjustments made for
• Depreciation viewed as a sale of a portion of the
depreciable asset to external parties and thus
represents realisation of profit over the asset’s
remaining useful life

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Intragroup Transactions
• Intragroup sale of depreciable non-current assets
– Entries if assets recorded with cost and
accumulated depreciation:
Dr Profit on sale of non-current asset [seller]
Dr Non-current asset
Cr Accumulated depreciation

Dr Accumulated depreciation
Cr Depreciation expense [seller]

– Portion of adjustments attributed to NCI if asset

transfer is upstream transaction 14

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 Session 5: Consolidated Income
Statement

Illustration 2: Intragroup Transactions

The income statements of P Ltd and S Ltd as at 31 Dec 20X9
are as follows:
Income Statements for year ended 31 Dec 20X9 P Ltd S Ltd
£’000 £’000
Turnover 100 70
Cost of Sales 60 40
Gross profit 40 30
Other income 25 11
Operating expenses 10 16
Profit before tax 55 25
Tax 10 5
Profit after tax 45 20
Dividends 5 0
Profit for the year 40 20
.Retained profit brought forward 85 45
15
Retained profit carried forward 125 65

Illustration 2: Intragroup Transactions

P Ltd acquired 80% of the issued share capital in S Ltd on 31
December 20X5 when the retained earnings of P Ltd and S
Ltd were £60,000 and £25,000 respectively.

In May 20X9, S Ltd had sold goods costing £10,000 to P Ltd

for £30,000. Half of these goods are still unsold and remains
in the inventory of P Ltd. Other income revenue of P Ltd
included £20,000 gain on sale of machinery to S Ltd on 1
January 20X9. The cost and accumulated depreciation of the
machinery at point of sale were £40,000 and £24,000
respectively. It is the group’s policy to depreciate equipment
at 10% on cost per annum. The machinery had been
purchased on 1 January 20X3 and has no residual value.

Required:
Prepare a consolidated income statement of P Ltd for the
16
year ended 31 December 20X9.

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 Session 5: Consolidated Income
Statement

Intragroup Charges & Fees

• Intragroup charges and fees
– All intragroup charges (interest charges,
management fee, service fee, rental charges
etc.) should be eliminated

Dr Income
Cr Expenses

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Dividends
• Dividends paid by subsidiary
– Parent recognises dividend income from its
investment in subsidiaries

Dividends paid by subsidiary

To Parent: To Non-Controlling Interests:

Cancelled on Allocated to NCI account based on
consolidation share of profit for the year
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 Session 5: Consolidated Income
Statement

Dividends
• Dividends paid by subsidiary
– Only dividends paid externally should be shown
in the consolidated financial statements
– All dividends paid/payable to other entities and
received/receivable from other entities within
the group to be eliminated

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Dividends
• Dividends paid by subsidiary
– If subsidiary is 100% owned by the parent

Dr Dividend income
Cr Dividends paid

– If subsidiary is not wholly owned by the parent

Dr Dividend income
Dr Non-controlling interests
Cr Dividends paid
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 Session 5: Consolidated Income
Statement

Goodwill Impairment
• NCI calculated at net asset value
– Impairment charge on goodwill charged against

– Goodwill on consolidation calculated without regard

and not attributed to non-controlling interests
• NCI calculated at fair value
– Portion of impairment charge on goodwill

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Illustration 3: Dividends / Goodwill

The financial statements of P Ltd and S Ltd as at 31 Dec
20X9 are as follows:
SoFP as at 31 Dec 20X9 P Ltd S Ltd
£’000 £’000
Property, plant & equipment 300 150
Investment in S Ltd 200 -
Trade receivables 130 30
Dividend receivable 20
Bank 50 60
700 240
Share capital (£1 each) 400 120
Retained earnings 200 50
Trade payables 100 45
Dividend payable - 25
700 240
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 Session 5: Consolidated Income
Statement

Illustration 3: Dividends / Goodwill

Income Statements for year ended 31 Dec 20X9 P Ltd S Ltd
£’000 £’000
Sales 130 100
Cost of Sales 60 45
Gross profit 70 55
Dividend income 20 0
Operating expenses 20 10
Profit before tax 70 45
Tax 10 5
Profit after tax 60 40

.Dividends 30 25
Retained profit for the year 30 15
Retained profit brought forward 170 35
Retained profit carried forward 200 50

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Illustration 3: Dividends / Goodwill

P Ltd acquired 80% of the issued share capital of S Ltd on 1
January 20X6 for total consideration of £200,000. The share
capital and retained earnings for S Ltd on the acquisition date
were £120,000 and £30,000 respectively.

In December 20X8, S Ltd had sold goods costing £10,000 to

P Ltd for £20,000. Half of these goods were unsold as at 31
December 20X8 and these were subsequently sold by P Ltd
in February 20X9.

Goodwill is to be impaired by 20% after a review conducted

on 31 October 20X9. S Ltd declared a dividend of £25,000 in
December 20X9, which was also recorded by P Ltd
accordingly. The dividends have not been paid by S Ltd as at
year-end.
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 Session 5: Consolidated Income
Statement

Illustration 3: Dividends / Goodwill

P Ltd has charged S Ltd a management fee of 10% on sales
which had not been accounted for by both companies.

Required:
Prepare a consolidated income statement and consolidated
statement of financial position for P Ltd and its subsidiary as
at 31 December 20X9:

a) Based on the information above.

b) If the goodwill was impaired by 50% in October 20X8
instead and NCI was calculated at fair value. The shares
of S Ltd were traded at $2.50 each on acquisition date.

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Acquisition During the Year

• If subsidiary is acquired during financial year
– Subsidiary’s results only included in the
consolidated income statement from

– Income statement items apportioned on

unless indicated otherwise
• Exceptions include exceptional gains or losses
(e.g. gain on asset sale), dividends (eliminated
on consolidation)
– Items consolidated based on allocated costs of
assets and liabilities (e.g. depreciation based on
revalued amount) 26
References: Tan, L.T (2013); Ng, E.J et al. (2013)

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 Session 5: Consolidated Income
Statement

Illustration 4: Acquisition during the Year

Income Statements for year ended at 31 Dec 20X9 P Ltd S Ltd
£ £
Sales 80,000 60,000
Cost of Sales (50,000) (30,000)
Gross profit 30,000 30,000
Dividend income from S 20,000 -
Gain from sale of building - 16,000
Reorganization costs - (4,000)
Operating expenses (15,000) (5,000)
Profit before tax 35,000 37,000
Tax 10,000 5,000
Profit after tax 25,000 32,000
Dividends (5,000) (25,000)
Profit for the year 20,000 7,000
Retained profit brought forward 80,000 43,000
Retained profit carried forward 100,000 50,000
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Illustration 4: Acquisition during the Year

P Ltd acquired 80% of the issued share capital in S Ltd on 30
September 20X9 when the retained earnings of S Ltd was
£74,000. There were no intragroup transactions in the year.

S Ltd’s gain on sale of building relates to disposal of building

which occurred on 1 June 20X9. Reorganization costs were
incurred in November 20X9. Assume that neither of these
transactions affect the tax charge for the company.

All of S Ltd’s other revenues and expenses are accrued

evenly throughout the year.

Required:
Prepare a consolidated income statement of P Ltd for the
year ended 31 December 20X9.
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 Session 5: Consolidated Income
Statement

Thank You

Q&A

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