CIA3001 Corporate Accounting

CIA3001 Corporate qCHAPTER 12 Consolidated Statement of Financial Position

Accounting
1 Consolidated statement of financial position workings

ICAEW Strategic Credits

2 Mid-year acquisitions
3 Intra-group balances
WEEK 4
4 Unrealised intra-group profit
5 Fair value adjustments
WEEK 5: Consolidated statement of financial position
(Continued..)
6 Other consolidation adjustments
7 UK GAAP comparison WEEK 5
Semester 1, 2021/2022

CHAPTER 11
CIA3001 Corporate Accounting CHAPTER 11
CIA3001 Corporate Accounting
4 Unrealised intra-group profit
4 Unrealised intra-group profit

Only GROUP How does this UNREALISED PROFITS relate to the intra-group
SINGLE ENTITY transaction with THIRD balances as discussed in Week 4?
PARTY is reflected in
CONCEPT the accounts

Unrealised profits:
• Intra-group trading when

Therefore, intra-group transactions give rise to goods still held in inventory of

buying company; and

profits that are UNREALISED from group perspective • intra-group transfers of non-
current assets

CHAPTER 11
CIA3001 Corporate Accounting
4 Unrealised intra-group profit
CHAPTER 11
CIA3001 Corporate Accounting
Imagine that C Ltd buys 100% shares in A and B.
A and B then becomes the subsidiaries of C and 4 Unrealised intra-group profit
that C is the parent and has the control of both
A and B.
Because A and B are subsidiaries of
C, C is required to consolidate the accounts and The way in which this adjustment for the
report the financial performance of the company
as a GROUP. UNREALISED PROFT (URP) is made depends on

C❌
A, B and C also sell to each other whether the company making the SALE is the:
£
❌ £
SINGLE
A ENTITY
B PARENT SUBSIDIARY
£
❌
ALL INTRA-GROUP PROFITS
NEEDS TO BE ELIMINATED…
 As we have seen in section 4.3 any receivable/payable balances outstanding between group E
(PURP).
eliminated on consolidation. This is achieved by creating a provision for unrealised profit
companies, resulting from trading transactions, should be cancelled on consolidation. If these R
transactions have been undertaken at cost to the selling company no further problem arises. (PURP).
The way in which this adjustment is made depends on whether the company making the sale is
11
However, each company in a group is a separate trading entity and may sell goods to another the parent
The or a subsidiary.
way in which this adjustment is made depends on whether the company making the sale is
group member at a profit. If these goods remain in inventories at the end of the reporting the parent or a subsidiary.
period this profit is unrealised from the group's point of view. 5.2.1 Parent sells goods to a subsidiary
In the consolidated statement of financial position, applying the single entity concept, 5.2.1 Parent sells goods
The required to aissubsidiary
treatment best illustrated by an example.

CIA3001 Corporate Accounting CIA3001 Corporate Accounting

inventories should be measured at the lower of cost and net realisable value to the group. The required treatment is best illustrated by an example.
Where goods transferred at a profit are still held at the year end the unrealised profit should be Worked example: Intra-group profit (P S)
eliminated on consolidation. This is achieved by creating a provision for unrealised profit
CHAPTER 11 (PURP). CHAPTER 11 Worked example: Intra-group profit (P S)
Ant Ltd, a parent company, sells goods which cost £1,600 to Bee Ltd for £2,000. Ant Ltd owns
75%Ltd,
Ant of the sharescompany,
a parent in Bee Ltd. Bee
sells Ltd still
goods hold
which the£1,600
cost goodsto inBee
inventories at the year
Ltd for £2,000. end.owns
Ant Ltd
4 Unrealised
The way inintra-group profit-
which this adjustment Inventories
is made depends on whether the company making the sale is 4 Unrealised intra-group profit- Inventories
75% of the shares in Bee Ltd. Bee Ltd still hold the goods in inventories at the year end.
Unrealised
the parentprofits must be eliminated from the statement of financial position on consolidation
or a subsidiary. In the single entity accounts of Ant Ltd the profit of £400 should be recognised. In the single
C
to prevent the overstatement of group profits.
ParentParent
5.2.1
(P) sells goods to Subsidiary (S), i.e. P
sells goods to a subsidiary
S H Parent (P) sells goods to Subsidiary (S) i.e. P
In the single
entity entity
accounts accounts
of Bee Ltd the of Ant Ltd theshould
inventory profit of
be£400 shouldatbe
measured
entity accounts of Bee Ltd the inventory should be measured at £2,000.
£2,000. S (Continued….)
recognised. In the single
A
5.2 Inventories P
If we simply add together the figures for retained earnings and inventory as recorded in the
The required treatment is best illustrated by an example. T If we simplystatements
individual add together the figures
of financial for retained
position of Ant earnings
Ltd and Beeand Ltd,
inventory as recorded
the resulting figuresin the
for
As we have seen in section 4.3 any receivable/payable balances outstanding between group individual statements
E consolidated retainedofearnings
financialand position of Ant Ltdinventory
consolidated and Bee Ltd, the resulting
will each figuresby
be overstated for£400. A
companies, resulting from
Worked example: trading transactions,
Intra-group profit (P S) should be cancelled on consolidation. If these R
consolidated
consolidationretained earnings
adjustment and consolidated
is therefore necessary as inventory
follows:will each be overstated by £400. A
transactions have been undertaken at cost to the selling company no further problem arises.
Ant Ltd, a parent company, sells goods which cost £1,600 to Bee Ltd for £2,000. Ant Ltd owns 11 consolidation adjustment is therefore necessary as follows: £ £
However,
75% of theeach company
shares in Beein Ltd.
a group
Bee is a separate
Ltd trading
still hold the goods entity and may sell
in inventories at goods
the year toend.
another DR Seller's (Ant Ltd's) retained earnings (ie, adjust in retained earnings £400 £
group member at a profit. If these goods remain in inventories at the end of the reporting DR Seller's
working) (Ant Ltd's) retained earnings (ie, adjust in retained earnings 400
In thethis
period single entity
profit accounts of
is unrealised Antthe
from Ltdgroup's
the profit of £400
point should be recognised. In the single
of view.
entity accounts of Bee Ltd the inventory should be measured at £2,000. CR working)
Inventories in consolidated statement of financial position 400
In the consolidated statement of financial position, applying the single entity concept, CR Inventories in consolidated statement of financial position 400
Point to note: In this example, as the parent was the seller the unrealised profit is all 'owned' by
If we simply add together the figures for retained
of cost earnings and inventory
valueastorecorded in the Point to note: In this example, as theisparent was the is all 'owned' by
inventories should be measured at the lower and net realisable the group. the shareholders of Ant Ltd. None attributable toseller the unrealised profit
the non-controlling interest.
individual
Where goods statements
transferred ofatfinancial
a profitposition of Ant
are still held at Ltd
the and
yearBee
endLtd,
the the resulting
unrealised figures
profit for be
should the shareholders of Ant Ltd. None is attributable to the non-controlling interest.
consolidated
eliminated retained earnings
on consolidation. This and consolidated
is achieved inventory
by creating will each
a provision forbe overstated
unrealised by £400. A
profit
NOTE:
consolidation
(PURP). adjustment is therefore necessary as follows: o In this example, as the parent was the seller
£ £ 5.2.2 the unrealised
Subsidiary sells goods to parent or to another profit is all 'owned’ by the
subsidiary
The
DRway in which
Seller's (Antthis adjustment
Ltd's) retainedisearnings
made depends onin
(ie, adjust whether
retainedtheearnings
company making400 the sale is 5.2.2 Subsidiary sells goods to parent or to another subsidiary
shareholders of Ant Ltd.
the parent or a subsidiary.
working) Where the subsidiary is the selling company the profit on the transfer will have been recorded in
CR Inventories in consolidated statement of financial position 400 the subsidiary's books. o None
Where the subsidiary is the selling company the profit
is on the transfer
attributable towill
thehave
non-been recorded in
5.2.1 Parent sells goods to a subsidiary the subsidiary's books. controlling interest.
Point to note: In this example, as the parent was the seller the unrealised profit is all 'owned' by
therequired
The shareholders of Ant
treatment Ltd. None
is best is attributable
illustrated to the non-controlling interest.
by an example. Worked example: Intra-group profit (S P or S)
Worked example: Intra-group profit (S P or S)
Worked example: Intra-group profit (P S) Using the worked example above, if we now assume that Bee Ltd sold the goods to Ant Ltd the
Using the worked example above, if we now assume that Bee Ltd sold the goods to Ant Ltd the
5.2.2 Ant
Subsidiary sells goods to parent adjustment would be as follows:
Ltd, a parent company, sells goodsorwhich
to another subsidiary
cost £1,600 to Bee Ltd for £2,000. Ant Ltd owns adjustment would be as follows:
75% of the
Where shares
the in BeeisLtd.
subsidiary the Bee Ltdcompany
selling still hold the
the goods in inventories
profit on the transferat the
will yearbeen
have end.recorded in ££ £ £
DR Seller's
DR Seller's (Bee
(Bee Ltd's)
Ltd's)retained
retainedearnings
earnings(ie,
(ie,adjust netassets
adjustininnet assets working
working 2)2) 400
400
In the
the subsidiary's
single entitybooks.
accounts of Ant Ltd the profit of £400 should be recognised. In the single CR Inventories in consolidated statement of financial position 400
CR Inventories in consolidated statement of financial position 400
entity accounts of Bee Ltd the inventory should be measured at £2,000.
Worked
If we simplyexample:
add togetherIntra-group
the figuresprofit (S P or
for retained S)
earnings and inventory as recorded in the
individual
Using thestatements of financial
worked example position
above, if we of
nowAntassume
Ltd andthat
BeeBee
Ltd,Ltd
thesold
resulting figures
the goods to for
Ant Ltd the
consolidated retained earnings
adjustment would be as follows: and consolidated inventory will each be overstated by £400. A
consolidation adjustment is therefore necessary as follows: £ £ ICAEW 2020 Consolidated statement of financial position 48
ICAEW 2020 Consolidated statement of financial position 485
DR Seller's (Bee Ltd's) retained earnings (ie, adjust in net assets working 2) £400 £
DRCRSeller's (Ant Ltd's)
Inventories retained earnings
in consolidated (ie, adjust
statement in retained
of financial earnings
position 400 400
working)
CR Inventories in consolidated statement of financial position 400

CHAPTER 11
CIA3001 Corporate Accounting
Point to note: In this example, as the parent was the seller the unrealised profit is all 'owned' by
the shareholders of Ant Ltd. None is attributable to the non-controlling interest.
CHAPTER 11
CIA3001 Corporate Accounting
ICAEW 2020 Consolidated statement of financial position 485
4 Unrealised intra-group profit- Inventories 4 Unrealised intra-group profit- Inventories
5.2.2 Subsidiary sells goods to parent or to another subsidiary
Subsidiary
Where the(S) sells goods
subsidiary to Parent
is the selling (P)
company theor another
profit Subsidiary,
on the transfer beenSrecorded
will have i.e. P/S
in Subsidiary (S) sells goods to Parent (P) or another Subsidiary, i.e. S P/S
the subsidiary's books.

Worked example: Intra-group profit (S P or S)

Using the worked example above, if we now assume that Bee Ltd sold the goods to Ant Ltd the
adjustment would be as follows: NET ASSETS of subsidiary will be reduced
£ £
DR Seller's (Bee Ltd's) retained earnings (ie, adjust in net assets working 2) 400 S owned by P and NCI Who OWNS the
CR Inventories in consolidated statement of financial position 400

NON-
Subsidiary??
(4) Non-controlling
PARENT interest CONTROLLING £ £ C
(P) INTEREST
Viv Ltd – Share of net assets at acquisition (25% 24,000 (W2)) 6,000 H
A
– Share of post-acquisition (25% 36,000 (W2)) 9,000
ICAEW 2020 Consolidated statement of financial position 485 (NCI) P
15,000 T
Neil Ltd – Share of net assets at acquisition (1/3 11,000 (W2)) 3,667 E
o Because the NET– Share
ASSETS of subsidiary is reduced
of post-acquisition by the (W2))
(1/3 14,000 URP, the group’s and 4,666
NCI’s share in retained earnings shall
R
be reduced by P’s and NCI’s share in S. 8,333 11
23,333
o Inventories in the CSFP should be reduced by the full amount irrespective of whether the parent or subsidiary is the
selling
(5) company
RetainedBUT NCI is only affected if subsidiary is seller
earnings
£
Rik Ltd 100,000
Viv Ltd – Share of post-acquisition retained earnings (75% 36,000 (W2)) 27,000
Neil Ltd – Share of post-acquisition retained earnings (2/3 14,000 (W2)) 9,334
Goodwill impairment to date (W3) (3,000)
133,334

Points to note: Answer to Interactive question 2

1 The net assets of the subsidiary making the sale at the end of the reporting period will be (a) Net assets (W2)
reduced by the amount of the unrealised profit. Any subsequent calculations based on this Post-
net assets figure will therefore be affected as follows: Year end Acquisition acquisition
£ £ £
The group share of the post-acquisition retained earnings of the subsidiary should be Share capital 1,000 1,000 –
reduced, ie, the group will bear its share of the adjustment. Retained earnings (15,000 + (5/12 (15,600 – 15,600 15,250 350
The non-controlling interest will be based on these revised net assets ie, the non- 15,000)))
16,600 16,250
controlling interest will bear its share of the adjustment.
(b) Goodwill (W3)
2 Inventories in the consolidated statement of financial position should be reduced by the full
£

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amount of the unrealised profit irrespective of whether the parent or a subsidiary is the Consideration transferred 20,000
selling company. Plus non-controlling interest at acquisition (16,250 20% (W2)) 3,250

CHAPTER 11 CHAPTER 11
3 If Bee Ltd had sold the goods to another subsidiary, rather than to the parent, the Less net assets at acquisition (W2) (16,250)
7,000
adjustment should be the same.

4 Unrealised intra-group profit- Inventories 4 Unrealised intra-group profit- Inventories

(c) Profit from S Ltd included in consolidated retained earnings
£
Share of post-acquisition retained earnings of S Ltd (80% 350 (W2)) 280
Interactive question 3: Unrealised profits
Answer to Interactive question 3
P Ltd owns 80% of S Ltd, which it acquired when the retained earnings of S Ltd were £20,000. £ £
No goodwill was acquired. Statements of financial position at the end of the current accounting DR Seller's (S Ltd's) retained earnings (adjust in net assets working) 3,000
period are as follows. CR Inventories in CSOFP (1/2 6,000) 3,000
P Ltd S Ltd
WORKINGS
£ £
Assets 170,000 115,000 (1) Group structure
P Ltd
Share capital 30,000 10,000
Retained earnings 100,000 65,000 80%
Equity 130,000 75,000
Liabilities 40,000 40,000
170,000 115,000

During the current accounting period S Ltd sold goods to P Ltd for £18,000, which gave S Ltd a S Ltd
profit of £6,000. At the end of the reporting period half of these goods were included in P Ltd's
inventories.
Requirement
Show how the adjustment to eliminate unrealised profits should appear in the consolidation
workings for P Ltd.
Fill in the proforma below. ICAEW 2020 Consolidated statement of financial position 505
£ £
DR
CR
WORKINGS
(1) Group structure
P Ltd
 CIA3001 Corporate Accounting CIA3001 Corporate Accounting
CHAPTER 11 Acquisition Year end CHAPTER 11
4 Unrealised intra-group profit SC: 10k 4 Unrealised intra-group profit- Non-current asset transfers
(2) S Ltd net assets SC: 10k
RE: 20k As well as trading with each other, group companies may wish to transfer non-
Post- RE: 65k
Year end Acquisition acquisition URP: (3k) 62k
NET £ £ £ £ current assets (NCA).
Share capital ASSETS, i.e. 10,000 10,000
Retained earnings A-L in S is If the asset is transferred at a price different from the transferor's carrying
Per question represented 65,000
(2) S Ltd net
Lessassets
PURP by Equity (3,000) amount two issues arise:
(E). 62,000
End of the reporting20,000
Acquisition42,000Post- C
72,000 30,000 H
period acquisition A o The selling company will have recorded a profit or loss on sale.
(3) Non-controlling interest £ £ £ £ £ P
ShareShare of net assets at acquisition
capital (20% 30,000) 6,000 T o The purchasing company will have recorded the asset at the amount paid to acquire it,
Shareearnings
Retained of post-acquisition (W2) (20% 42,000) 8,400 E
Per question 14,400 R and will use that amount as the basis for calculating depreciation.
(4) Less: PURP
Retained earnings £ 11
P Ltd 100,000 o On consolidation, the single entity concept applies. The consolidated statement of
Share of S Ltd (80% 42,000 33,600
(W2))
Post-acq NA of S financial position should show non-current assets at their cost to the group, and
(3) Non-controlling interest 133,600
£ any depreciation charged should be based on that cost.
Answer
Share to Interactive
of net question 4(W2)
assets at acquisition
Share of post-acquisition (W2)will be measured at
o In other words, the group accounts should reflect the non-current asset as if the transfer
Following the transfer the asset
£ had not been made.
Cost to S Ltd 15,000
(4) Retained earnings
Less depreciation – (15,000/3 remaining years (8,000 is 2/5 of cost)) (5,000)
10,000 £
P Ltd
Had the transfer not been made, the asset would stand in the books at
Share of S Ltd £
Cost 20,000
Less: Accumulated depreciation at date of 'transfer' (8,000)
See Answer at the end of this chapter.
Charge for current year (£20,000/5) (4,000)
8,000
Overall adjustment in CSOFP
5.3 Non-current asset transfers £ £
DR Seller's (P Ltd's) retained earnings 2,000
As well
CRasNon-current
trading withassets
each other, group companies may wish to transfer non-current assets 2,000
(NCA).
Answer to Interactive question 5
If the asset is transferred at a price different from the transferor's carrying amount two issues
arise:(1) Group structure
P Ltd

CIA3001 Corporate Accounting CIA3001 Corporate Accounting

The selling company will have recorded a profit or loss on sale.
company will have recorded the asset at the amount paid to acquire it, and
The purchasing 60%
CHAPTER 11 will use that amount as the basis for calculating depreciation. CHAPTER 11
4 Unrealised
position
intra-group Non-current asset transfers
Ltd single entity concept applies. The consolidated statement of financial
On consolidation,S the
profit-assets at their cost to the group, and any depreciation
4 Unrealised intra-group profit- Non-current asset transfers
(2) should show
Net assets of non-current
S Ltd
charged should be based on that cost. In other words, the group accounts should
Year end =reflect the
Acquisition
non-current asset as if the transfer had not been made. date
£ £
The adjustment in the consolidated statement of financial position should be calculated as
Share capital 20,000
follows: Retained earnings 85,000
£
As with inventories the impact of the adjustment will depend on
Add fair value uplift (30,000 – 20,000) 10,000
Carrying amount of NCA
Less goodwill at year end in the transferee's financial
Less carrying amount of NCA at year end if transfer had not been made
statements
(5,000) X
(X)
whether the parent company or the subsidiary makes the sale.
90,000
Unrealised profit X
110,000
The adjustment for unrealised profit should then be made as:
£ £
DR Selling company retained earnings X
506 NCA
CR Financial Accounting and Reporting – IFRS
carrying amount in consolidated statement of financial ICAEW 2020
X
position
This treatment is consistent with that of inventories.
5.3.1 Parent sells non-current asset to subsidiary
As with inventories the impact of the adjustment will depend on whether the parent company or
the subsidiary makes the sale.

ICAEW 2020 Consolidated statement of financial position 487

(2) S Ltd net assets

Post-
Year end Acquisition acquisition
£ £ £ £
Share capital 10,000 10,000
Retained earnings
Per question 65,000
Less PURP (3,000)
62,000 20,000 42,000
72,000 30,000
(3) Non-controlling interest £
Share of net assets at acquisition (20% 30,000) 6,000

CIA3001 Corporate Accounting CIA3001 Corporate Accounting

Share of post-acquisition (W2) (20% 42,000) 8,400
14,400

CHAPTER 11 CHAPTER 11 (4) Retained earnings £

Non-current
P Ltd
asset transfers
100,000
Cost: £20,000
4 Unrealised intra-group profit- Non-current asset Share of S Ltd (80%
(W2))
42,000
Useful Life: 5 years
33,600

transfers Dep = £20,000 / 5 = £4,000 per year. 133,600

Because accumulated dep is £8,000 (as stated
Answer to Interactive question 4
Parent sells non-current assets to subsidiary in Question), this means that the NCA had
Following the transfer the asset will be measured at been used for 2 years.
Interactive question 4: Non-current asset transfers £
Therefore, remaining life is 3 years. (5 – 2)
Cost to S Ltd 15,000
P Ltd owns 80% of S Ltd. P Ltd transferred to S Ltd a non-current asset at a value of £15,000 on Less depreciation – (15,000/3 remaining years (8,000 is 2/5 of cost)) (5,000)
1 January 20X7. The original cost to P Ltd was £20,000 and the accumulated depreciation at the 10,000
date of transfer was £8,000. The asset had, and still has, a total useful life of five years. Had the transfer not been made, the asset would stand in the books at
£
Requirement
Cost 20,000
Calculate the consolidated statement of financial position adjustment at 31 December 20X7. Less: Accumulated depreciation at date of 'transfer' (8,000)
Fill in the proforma below. Charge for current year (£20,000/5) (4,000)
8,000
Following the transfer the asset will be measured at
Overall adjustment in CSOFP
URP in NCA transfer
£ CA of NCA in the books of transferee (S). 10k £ £
Cost DR Seller's (P Ltd's) retained earnings Less CA of NCA in the books of transferor (P) (8k) 2,000
Less depreciation CR Non-current assets URP of NCA transfer 2k 2,000

Had the transfer not been made, the asset would stand in the books at NOTE:
Answer to Interactive question 5
£ As per the inventory example, because the URP is obtained by PARENT (P), this would not have any effect on NCI.
Cost (1) Group structure
Less: Accumulated depreciation at date of transfer P Ltd
Expense for current year
60%
Overall adjustment in CSOFP
£ £
DR Seller's (P Ltd's) retained earnings S Ltd
(ie, adjust in retained earnings working) (2) Net assets of S Ltd
CR Non-current assets Year end = Acquisition
date
 £ £
DR Seller's (P Ltd's) retained earnings
(ie, adjust in retained earnings working)
CR Non-current assets

Point to note: In this question, as the parent is the selling company, none of the adjustment is

CIA3001
See Answer at the end ofCorporate Accounting CIA3001 Corporate Accounting
attributed to the non-controlling interest.
this chapter.
CHAPTER 11 CHAPTER 11
4 Unrealised intra-group profit- Non-current asset transfers 4 Unrealised intra-group profit- Non-current asset transfers

5.3.2 Subsidiary sells

Subsidiary sells noncurrent
non-current assetasset to Parent
to parent NOTE:
Again a consolidation adjustment should be made to reflect the situation that would have 1 As the subsidiary is the seller the adjustment to retained
existed if the transfer had not been made. earnings should be made in the net assets working.
The amount of the adjustment should be calculated as before (see above).
2 Any subsequent calculations based on this net assets figure
will therefore be affected as follows:
The adjustment is then made as follows: o The group share of the post-acquisition retained earnings
£ £
of the subsidiary will be reduced ie, as for sale of
DR Seller's (S Ltd) retained earnings (adjust in net assets working) X
inventories.
CR NCA carrying amount in consolidated statement of financial X
position o The non-controlling interest will be based on these
revised net assets, i.e, as for sale of inventories.
Points to note:
1 As the subsidiary is the seller the adjustment to retained earnings should be made in the
net assets working.
2 Any subsequent calculations based on this net assets figure will therefore be affected as
follows:
The group share of the post-acquisition retained earnings of the subsidiary will be
reduced ie, as for sale of inventories.
The non-controlling interest will be based on these revised net assets, ie, as for sale of
inventories.

CHAPTER 11
CIA3001 Corporate Accounting
488 Financial Accounting and Reporting – IFRS ICAEW 2020

CHAPTER 11
CIA3001 Corporate Accounting
5 Fair Value Adjustments :Calculation of goodwill
5 Fair Value Adjustments :Calculation of goodwill :
• Goodwill in S’s statement of financial position is NOT PART of the
The net assets of the subsidiary need to be valued at FAIR
IDENTIFIABLE net assets acquired.
VALUE at the acquisition date. o If S’s own statement includes goodwill, this SHOULD NOT BE
o However, the value of the net assets may be presented CONSOLIDATED.
DIFFERENTLY in the books of the subsidiary prior to the acquisition. o The goodwill is deducted from the Net Asset Working for Retained
o Therefore, the DIFFERENCE between the FAIR VALUE and the Earnings at acquisition as well as the Retained Earning at the end of the
CARRYING AMOUNTS should be treated in CONSOLIDATION reporting period.
ADJUSTMENT. • Adjustments may also need to be taken up in subsequent
(2) S Ltd net assets
periods: Post-
o Changes in acquiree’s amounts Year end
for Acquisition
non-current assetsacquisition
(NCA) and the
£ £ £ £
accumulated
Share capital depreciation. 10,000 10,000
Such changes
o Retained earnings affects current period’s dep/amort charges in the
Per question
consolidated
Less PURP
statement of 65,000
profit
(3,000)
or loss.
o Other adjustments may need to be made. 62,000 Example:
20,000 Contingent
42,000 liabilities
recognized at acquisition date is disclosed72,000 by 30,000
way of note.
(3) Non-controlling interest £
Share of net assets at acquisition (20% 30,000) 6,000
Share of post-acquisition (W2) (20% 42,000) 8,400
14,400
(4) Retained earnings £
P Ltd 100,000
Share of S Ltd (80% 42,000 33,600
(W2))
133,600

Answer to Interactive question 4

Following the transfer the asset will be measured at
£
Cost to S Ltd 15,000
Less depreciation – (15,000/3 remaining years (8,000 is 2/5 of cost)) (5,000)
10,000
Had the transfer not been made, the asset would stand in the books at
£
Cost 20,000
Less: Accumulated depreciation at date of 'transfer' (8,000)

CIA3001 Corporate Accounting CIA3001 Corporate Accounting

Charge for current year (£20,000/5) (4,000)
8,000

CHAPTER 11 CHAPTER 11 Overall adjustment in CSOFP

£ £
DR Seller's (P Ltd's) retained earnings 2,000
5 Fair Value Adjustments :Calculation of goodwill 5 Fair Value Adjustments
CR Non-current assets :Calculation of goodwill 2,000

Answer to Interactive question 5

Interactive question 5: Fair value adjustments (1) Group structure
P Ltd
P Ltd acquires 60% of S Ltd on 31 December 20X4 for £80,000. The statement of financial
position of S Ltd at this date is as follows.
£ 60%
Freehold land (fair value £30,000) 20,000
Goodwill arising on the acquisition of a sole trader 5,000 S Ltd
Sundry assets (carrying amount = fair value) 130,000
(2) Net assets of S Ltd
155,000 Year end = Acquisition
Share capital 20,000 date
Retained earnings 85,000 £ £
Equity 105,000 Share capital Increase in CARRYING AMOUNT due to FAIR VALUE 20,000
Liabilities 50,000 Retained earnings 85,000
155,000 Add fair value uplift (30,000 – 20,000) 10,000
Less goodwill (5,000)
Requirement 90,000
Calculate the goodwill acquired in the business combination with S Ltd. Fill in the proforma FAIR VALUE of S’s NET ASSETS 110,000
below.
(1) Group structure
P Ltd 506 Financial Accounting and Reporting – IFRS ICAEW 2020

60%

S Ltd
(2) Net assets of S Ltd
Year end = Acquisition date
£ £
Share capital
Retained earnings
CHAPTER 11
CIA3001 Corporate Accounting CHAPTER 11
CIA3001 Corporate Accounting
5 Fair Value Adjustments :Calculation of goodwill 6 Other Consolidation Adjustments: Other reserves in Subsidiary
If there are any other reserves in the S, this should be treated EXACTLY
(3) Goodwill
£ C like the retained earnings.
Consideration transferred 80,000 H
Non-controlling interest at acquisition (40% 110,000 (W2)) 44,000
A • Group share of any POST ACQUISITION movement in other reserves
P
Less FV of net assets at acquisition (W2) (110,000) T SHOULD BE RECOGNIZED in CSFOP.
Goodwill 14,000 E
• Separate working should be used for EACH RESERVE.
R
Answer to Interactive question 6 • If S is loss-making or having NEGATIVE RESERVES, the group should
11
£ CONSOLIDATE its share of POST ACQUISITION
Chris Ltd's share of Andy Ltd's post-acquisition reserves (W1) 2,832,000 LOSSES/NEGATIVE LOSSES
Goodwill arising on consolidation (W2)
NOTE: 4,460,000
Adjustment
1. Intothe
Andy Ltd's depreciation
Consolidated SOFP charge (W3) the freehold land SHOULD100,000
(CSOFP),
be presented at
WORKINGS £30,000.
2. The goodwill in S’ SOFP SHOULD NOT be recognized as an
(1) Net assets and post-acquisition reserves
intangible asset in Consolidated SOFP (CSFOP). At Post
7.1 Other reserves in a subsidiary
Year end acquisition acquisition
£ £ £ A subsidiary may have other reserves apart from retained earnings in its statement of financial
Andy Ltd position, eg, a revaluation surplus. If this is the case, such reserves should be treated in exactly
Net assets 10,000,000 5,000,000 5,000,000 the same way as retained earnings.
PPE fair value uplift 1,000,000 1,000,000 - Other reserves at acquisition form part of the net assets at acquisition, ie, they should be
Depreciation thereon – 3 years = 30% (300,000) – (300,000) recorded in the net assets working at acquisition.
Contingent liability (80,000) (100,000) 20,000
The group share of any post acquisition movement in other reserves should be recognised
10,620,000 5,900,000 4,720,000
in the consolidated statement of financial position.
Chris Ltd's share – 60% 2,832,000
Points to note:
(2) Goodwill
£ 1 A separate working should be used for each reserve; do not mix retained earnings with
Consideration transferred 8,000,000 other reserves as the other reserves may include amounts which are not distributable by
way of dividend.
Non-controlling interest (40% 5,900,000 (W1)) 2,360,000
Net assets (W1) (5,900,000) 2 If a subsidiary is loss-making or has any other negative reserves the group should
Goodwill 4,460,000 consolidate its share of the post-acquisition losses/negative reserves.

(3) Depreciation charge for year ended 30 June 20X5 7.2 Accounting policy alignments

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£
On consolidation uniform accounting policies should be applied for all amounts. This is another
Additional charge (10% 1,000,000) 100,000
consequence of the single entity concept.
CHAPTER 11 Point to note: If future events resulted in the contingent liability ceasing to exist (eg, because it CHAPTER 11 If the parent company and subsidiary have different accounting policies the balances in the
relates to a legal claim being defended and the court judgement is in favour of the defendant), it subsidiary's financial statements should be adjusted to reflect the accounting policies of the
6 Other Consolidation Adjustments: Accounting policy alignments
should be re-measured at £nil and the whole of the remaining £80,000 should be recognised in
6 Other Consolidation Adjustments: Accounting policy alignments
parent company.
current • period profit or loss.
On consolidation If future accounting
uniform events resultpolicies
in the contingent
should beliability
appliedcrystallising
for all into a Point to note: These adjustments are made in the net assets working.
liability (eg, because the court judgement is in favour of the plaintiff), no adjustment would be
requiredamounts. This
to the year endisnet
another
assetsconsequence single entity concept
of the would have been recognised
because the liability . by the Interactive question 7: Accounting policy alignments
subsidiary in its separate financial statements. William Ltd has been 85% owned by Mary Ltd for some years. On 1 January 20X4 William Ltd
• If the parent company and subsidiary have different accounting policies the acquired an investment property for £2,000,000 and elected to apply the cost model,
Answerbalances in the question
to Interactive subsidiary's
7 financial statements should be adjusted to reflect depreciating over 50 years. Therefore, the carrying amount at year end was £1,960,000. Group
policy is to use the fair value model, and the fair value of property at the year end is £2.15million.
the accounting policies of the parent company.
Following the transfer the investment property will be included at £ £ Requirement
DR •Investment property
Note: These adjustments are made in the net assets working. 190,000 Set out the adjustment required in the preparation of the consolidated statement of financial
CR Depreciation charge 40,000 position at 31 December 20X5.
CR Gain on investment property 150,000
Fill in the proforma below.
Following the adjustment the asset will be included at:
£
Carrying amount of investment property in CSOFP
Carrying amount in William Ltd's SOFP
Increase in carrying amount
£ £
DR Investment property
CR Consolidated retained earnings
ICAEW 2020 Consolidated statement of financial position 507 CR Non-controlling interest
See Answer at the end of this chapter.

492 Financial Accounting and Reporting – IFRS ICAEW 2020

CIA3001 Corporate Accounting CIA3001 Corporate Accounting

CHAPTER 11 CHAPTER 11 7 UK GAAP Comparison
6 Other Consolidation Adjustments: Accounting policy alignments
FRS 102 IFRS
To resort to UNIFORM ACCOUNTING POLICY for the whole group NCI measured at its SHARE OF NET ASSETS. IFRS 3 – NCI measured at FAIR VALUE or at IT’S SHARE
Add back the depreciation charged, as the fair value model is being used for group accounting. OF FAIR VALUE OF NET ASSETS
£ Acquisition related cost ADDED to the cost of investment Acquisition related costs are recognized as an EXPENSE in profit
Carrying amount of plant in CSOFP 2,150,000 and loss as incurred.
Carrying amount in William Ltd's SOFP 1,960,000
Estimation of fair value of amount payable as contingent Fair value of consideration is recognized as part of
Increase in carrying amount 190,000
consideration is added to the cost of investment at the consideration transferred.
And the effect in the CSOFP will be as follows acquisition date, IF it is PROBABLE and CAN BE
£ £ MEASURED. Subsequent adjustments to fair value that occur within
DR Investment property 190,000 measurement period AND are as a result of additional
CR Consolidated retained earnings (85%) £190,000 * 85% 161,500 IF later the amount becomes PROBABLE and CAN BE information are related to acquisition date,
CR Non-controlling interest (15%) 28,500 RELIABLY MEASURED, the additional consideration is added increasing/decreasing goodwill.
£190,000 * 15% and related back to acquisition date.
IF these two conditions are not fulfilled, they are not related back
Changes to the estimate outside 12 month accounted for in to acquisition date but recognized as EXPENSE in profit or loss.
FRS102 Accounting Policies, Estimates and Errors and
recognized PROSPECTIVELY in profit and loss account. Measurement of contingent consideration reassessed at FAIR
VALUE EACH YEAR, difference taken to profit or loss (unless
There is NO specific requirement to reassess to fair value at contingent consideration is in shares – recognized as part of
each year end. equity)
 CIA3001 Corporate Accounting CIA3001 Corporate Accounting
CHAPTER 11 CHAPTER 11
7 UK GAAP Comparison
FRS 102 IFRS CLASS WORKED EXERCISES:
Goodwill is amortised over its estimated useful economic life. IFRS 3 PROHIBITS amortization of goodwill and requires Self test Questions
If cannot be estimated it should NOT be more than 10 years. annual impairment reviews.
Negative goodwill is recognized as a separate asset in the IFRS 3 requires immediate recognition of negative q Chapter 11: Questions
CSOFP. goodwill as a GAIN in profit or loss. - 10, 12, 13, 14
A subsidiary should be excluded from consolidation if NO such exemption on this basis exists under IFRS 10
severe long-term restrictions prevent the parent exercising (although control may be lost due to the restrictions, and the
control. entity ceases to be classified as a subsidiary). q Continue with the rests of the questions that you
have not attempted in both Chapters 10 and 11,
particularly Questions 13 (Dublin) and 14
(Close)