ACCA: Financial Accounting (F3)

CONSOLIDATION
Group: A group exists where one entity, the parent (referred to as 'the investor'), has control over another entity,
the subsidiary (referred to as 'the investee'),

Criteria to Control: IFRS 10 Consolidated Financial Statements specifies three criteria that must apply if one entity
is to have control over another:
 power over the investee, which is normally exercised through the majority of voting rights (i.e. owning
more than 50% of the equity shares),
 exposure or rights to variable returns from involvement (e.g. a dividend), and
 the ability to use power over the investee to affect the amount of investor returns. This is regarded as a
crucial determinant in deciding whether or not control is exercised. For e.g:
o The parent has power to govern the financial and operating policies of the enterprise by statute
or under an agreement
o The parent has the power to appoint or remove a majority of members of the board of directors
(or equivalent governing body)
o The parent has power to cast a majority of votes at meetings of the board of directors

Parent: A parent is an entity that controls one or more entities.

Subsidiary: A subsidiary is an entity that is controlled by another entity.
Consolidated or group financial statements: The financial statements of a group presented as those of a single
economic entity.
Non-controlling interest: Non-controlling interest (NCI) arises when the parent entity controls a subsidiary but
does not own 100% of it; e.g. if P owns only 70% of the ordinary shares of S, there is a NCI of 30%. In consolidated
SOFP, it is included after Equity.
Goodwill: The value of a company will normally exceed the value of its net assets. The difference is goodwill. This
goodwill represents assets not shown in the statement of financial position of the acquired company such as the
reputation of the business and the loyalty of staff, etc.
Goodwill = Fair Value of Consideration Paid – Fair Value of Net Assets Acquired
Where less than 100% of the subsidiary is acquired, the value of the subsidiary comprises two elements:
 The value of the part acquired by the parent;
 The value of the part not acquired by the parent, known as the non-controlling interest.
So in such a case, Goodwill = Fait value of Consideration Paid + Fair Value of NCI at Acquisition – Fair Value of Net
Assets Acquired
Positive goodwill is:-
 Arises where cost of investment exceeds the value of net assets purchased
 It is recognized as an intangible non-current asset in the SOFP
 Tested annually for impairment (amortization of goodwill is not permitted). Impairment of goodwill is not
examinable for F3 purposes
Negative goodwill:-
 Arises where the cost of the investment is less that the value of net assets purchased.
 Negative goodwill is credited directly to the statement of profit or loss as income for the year (being gain
on bargain purchase.
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 ACCA: Financial Accounting (F3)

Pre-acquisition profits: These are the reserves which exist in a subsidiary company at the date when it is acquired.
These are included in the goodwill calculation.

Post-acquisition profits: These are profits made and included in the retained earnings of the subsidiary company
since acquisition. They are included in group reserves.

To ensure that an accurate figure is calculated for goodwill:

 the consideration paid for a subsidiary must be accounted for at fair value
 the subsidiary’s identifiable assets and liabilities acquired must be accounted for at their fair values.

Fair Value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.

Fair Value Adjustments

1) In the Books of Parent (both pre and post-acquisition)
Asset (Dr)
Revaluation Reserve (Cr)
(same as Revaluation in IAS 16)
2) In the Books of Subsidiary (At Acquisition)
Asset (Dr)
Goodwill (Cr)
3) In the Books of Subsidiary (Post Acquisition)
Asset (Dr)
Revaluation Reserve (Cr)
(same as Revaluation in IAS 16)

Intra Group (Current Account) Balances

If the companies within the same group trade with each other, then this will probably lead to:
 A receivables account in one company’s SFP
 A payables account in the other company’s SFP.
These are amounts owing within the group rather than outside the group and therefore they must not appear in
the consolidated statement of financial position. They are therefore cancelled against each other on consolidation.

Unrealized Profit
Profits made by members of a group on transactions with other group members are:
 recognised in the accounts of the individual entities concerned, but
 in terms of the group as a whole, such profits are unrealised and must be eliminated from the
consolidated accounts
Such unrealised profits arise when one group entity sells to another group entity and those goods have not been
sold on externally by the end of the year. They are therefore known as unrealised profits. Unrealised profit may
arise within a group scenario on:
 Inventory where companies trade with each other
 Non-current assets where one company has transferred an asset to the other company within the same
group.

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Adjustment for unrealised profit in inventory

 Determine the value of closing inventory which has been purchased from the other company in the group.
 Use mark-up or margin to calculate how much of that value represents profit earned by the selling
company.
 Make the adjustments according to who the seller is.
If the seller is the parent company:
Dr Retained Earnings (P Co) (Step: 4)
Cr Group inventory (Consolidated SOFP)
If the seller is the Subsidiary company:
Dr Retained Earnings (S Co) (Step: 5)
Cr Group inventory (Consolidated SOFP)

Adjustment for unrealised profit in the transfer of non-current assets

If one company sells non-current assets to another company in the same group at a profit, adjustments must be
made for:
 Profit on sale
 Depreciation
The whole scenario has to be recreated as if the sales have never occurred.
Carrying Amount at Reporting Date XXX
Carrying value at reporting date if intra-group transfer had not occurred (XXX)
Adjustment XXXX
The double-entry of this adjustment is:
If the seller is the parent company:
Dr Retained Earnings (P Co) (Step: 4) [with gain on disposal]
Cr Retained Earnings (S Co) (Step: 5) [with excess depreciation]
Cr Group Property Plant & equipment (Consolidated SOFP)
If the seller is the Subsidiary company:
Dr Retained Earnings (S Co) (Step: 5) [with gain on disposal]
Cr Retained Earnings (P Co) (Step: 4) [with excess depreciation]
Cr Group Property Plant & equipment (Consolidated SOFP)

Preparing a consolidated SOFP:

1. The assets and liabilities of the parent and the subsidiary are added together on a line-by-line basis.
2. The investment in the subsidiary included in the parent's SOFP is replaced by a goodwill asset in the consolidated
SOFP.
3. The share capital and share premium balances of the parent and subsidiary are not added together; only the
parent entity balances for share capital and share premium are included in the consolidated SOFP. This reflects the
fact that the consolidated SOFP includes all of the assets and liabilities under the control of the parent entity.
4. The amount attributable to non-controlling interests is calculated and shown separately on the face of the
consolidated SOFP.
5. The group share of the subsidiary's post-acquisition retained earnings is calculated and included as part of group
retained earnings.

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 ACCA: Financial Accounting (F3)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

MECHANISM
Step: 1 Prepare Group Structure

Parent Company

80%(Assume)

Subsidiary Company
Step:2 Net Assets of Subsidiary Company

At Acquisition Date At Balance Sheet Date

Ordinary Share Capital XXX(*) XXX(*)
Share Premium XXX(*) XXX(*)
Revaluation Reserve XXX(**) XXX(**)
Retained Earnings XXX(**) (taken to step 5) XXX(**) (taken to step 5)
Any other Reserve XXX(**) (taken to step 8) XXX(**) (taken to step 8)
Fair Value Adjustment (if any) (step 11) XXX XXX
Total Net Assets XXX XXX

Taken to Step:3

* Should be unchanged at both dates

** Please consider Balance Sheet Date and Acquisition Date

Step:3 Calculation of GOODWILL

Fair Value of Consideration Paid (Fair value of COI) XXX

Fair Value of Non Controlling Interest at Acquisition Date XXX (taken to Step: 10)
XXX
Less: Fair Value of Net Assets of Subsidiary Company
At Acquisition Date (from Step 2 above) (XXX)
Goodwill on Acquisition XXX/(XXX)

Positive Negative
1. Recognize Goodwill asset 1. Recognize as income for the year
on Balance Sheet. in Statement of Comprehensive
2. Check for impairment at Income (being gain on bargain
Every year end. Purchase)

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 ACCA: Financial Accounting (F3)

Step:4 Retained Earnings of Parent Company

Retained Earnings of Parent Company at Balance Sheet Date XXX

Add/(Less): Adjustments passed if any (Step: 11) XXX/(XXX)
Total Retained Earnings of Parent Company XXX To be taken to Step:6

Step:5 Retained Earnings of Subsidiary Company

Retained Earnings of Subsidiary Company at Balance Sheet Date (from Step:1) XXX
Less: Retained Earnings of Subsidiary Company at Acquisition Date (from Step:1) (XXX)
Add/(Less): Adjustments passed if any (Step: 11) XXX/(XXX)
Total Retained Earnings of Subsidiary Company XXX

Attributable to Owners
Of Parent Company
(Amount X Holding %)
Attributable to NCI
(Amount X NCI%)
(Taken to Step: 6)

(Taken to Step: 10)

Step:6 Group Retained Earnings

Retained Earnings of Parent Company (from Step:4) XXX

Group Share of Retained Earnings of Subsidiary Company (from Step:5) XXX
Total Retained Earnings of Group at Balance Sheet Date XXX To be taken to
Consolidated SOFP

Step:7 Other Reserves of Parent Company

Other Reserves of Parent Company at Balance Sheet Date XXX

Add/(Less): Adjustments passed if any (Step: 11) XXX/(XXX)
Total Reserves of Parent Company XXX To be taken to Step:9

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 ACCA: Financial Accounting (F3)

Step:8 Other Reserves of Subsidiary Company

Other Reserves of Subsidiary Company at Balance Sheet Date (from Step:1) XXX
Less: Other Reserves of Subsidiary Company at Acquisition Date (from Step:1) (XXX)
Add/(Less): Adjustments passed if any (Step: 11) XXX/(XXX)
Total Other Reserves of Subsidiary Company XXX

Attributable to Owners
Of Parent Company
(Amount X Holding %)
Attributable to NCI
(Amount X NCI%)
(Taken to Step: 9)

(Taken to Step: 10)

Step:9 Group Other Reserves

Other Reserves of Parent Company (from Step:7) XXX

Group Share of Other Reserves of Subsidiary Company (from Step:5) XXX
Total Other Reserves of Group at Balance Sheet Date XXX To be taken to
Consolidated SOFP

Step:10 Non Controlling Interest (NCI)

Fair Value of NCI At Acquisition Date (from Step:3) XXX

NCI Share of Post-Acquisition Retained Earnings of Subsidiary Company (from Step: 5) XXX
NCI Share of Post-Acquisition Other Reserves of Subsidiary Company (from Step: 8) XXX
Total NCI at Balance Sheet Date XXX

To be taken to
Consolidated SOFP
Step:11 Consolidation Adjustments
 Fair Value Adjustment
 Intra Group trading