“CONSOLIDATION”

(P+S) – Single Economic entity concept

1. Line by line (100%) Addition

2. Intra group transaction / balances must be eliminated
3. Goodwill calculation
4. NCI value calculation
5. Consolidated earnings calculations

(W-1)Goodwill

Goodwill: An asset representing the future economic benefits arising from other assets acquired in a business
combination that are not individually identified and separately recognised.

Rs.'000 Rs.'000
Consideration paid by parent xx
add: Fair value of NCI xx (NCI no. of shares x MV of sub share price at Acq.)
less: FV of sub net assets at Acq.
share capital xx
share premium xx
OCE xx
RE xx
FV adjustment xx (xx)
Goodwill / Bargain purchase gain xx / (xx)

income (P&Loss) in the year of

1. Non-current asset (SOFP) acquisition
2. No amortization
3. Impairment test apply
(W-2)Consolidated Reserves

2(a)

Cons.
Retained. Cons.
Earnings OCE

Parent xx Xx
Parent Income/gain xx Xx
Parent Expense/ loss (xx) (xx)
Parent's share in sub's post Acq. Profit/loss(2(b)) xx Xx
xx Xx

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 1

 Equity section of consolidated SOFP

2(b)

Subsidiary's Post
Retained
earnings OCE
Subsidiary xx Xx
Sub's Income/gain xx Xx
Sub's Expense/ loss (xx) (xx)
(Only post) xx Xx

Parent share xx Xx
NCI share xx Xx

Subsidiary’s Equity

Post-
At Acquisition(W1)
Acquisition(W2)

Goodwill
Parent NCI
calculation

Consolidated NCI
R.E / OCE Working

(W-3)NCI

Non-controlling interest (NCI) is defined by IFRS 10 as: ‘the equity in a subsidiary not attributable, directly or
indirectly, to a parent.’

Rs.
FV of NCI at Acq. / Proportionate share of NCI xx
NCI share in sub post R/E xx
NCI share in sub post OCE xx
Adjustments:
NCI in imp loss on Goodwill (if 100% goodwill) (xx)
Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 2
 xx

Example 1

P ltd S ltd
Non-current asset 250 300
Investment in subsidiary 350
Current asset 100 100
TOTAL 700 400
Share Capital 100 50
Retained earnings 350 200
Other components of equity 150 100
Liabilities 100 50
Total 700 400

1. P ltd acquired80% of S ltd and at acquisition retained earnings and other components of equity of S ltd
were Rs.120 and Rs.70.
2. Fair value of NCI at acquisition Date was Rs.120

Required: Prepare consolidated statement of financial position.

Note the following features in following examples:

 The asset in the parent’s statement of financial position representing the cost of investment in
the subsidiary disappears in the consolidation.

 Each consolidated asset and liability is constructed by adding together the balances from the
statements of financial position of the parent and the subsidiary.

 The share capital (and share premium) in the consolidated statement of financial position is
always just the share capital (and share premium) of the parent. That of the subsidiary
disappears in the consolidation process.

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 3

 IFRS-3 Goodwill

Proportionate Full Goodwill

Only parent related goodwill

(W1) Consideration XX
(W1) Consideration xx NCI at fair value XX
NCI at proportinated share F.value of sub Net Assets at acq. (xx)
XX
Goodwill XX
F.value of sub Net Assets at acq.
(xx)
Goodwill xx

NCI should be measured at

proportionated share NCI should be measured at
proportionated share

Impairment loss on goodwill

Dr. Impairment loss xxx
Cr. Goodwill xxx

Full Goodwill Impairment loss will be charged to CRE and NCI in case of 100% goodwill;

Proportionated Goodwill Whereas it will be charged to CRE in case of proportionate goodwill.

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 4

 FAIR VALUE ADJUSTMENT

Parent's Assets

Fair value Fair value

increase decrease

Dr. Asset For Dr. Loss (Cons. RE/OCE) For

Cr. Gain (Cons. RE/OCE) Depreciation: (w2(a)) Depreciation
(w2(a)) Cr. Asset Reversal:
Dr. Dep Exp
(CRE(w2(a)) Dr. Asset
Cr. Asset Cr. Dep
(CRE(w2(a))

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 5

 Subsidiary's Assets

After Acquisition
At Acquisition date date

Fair value Fair value Fair value increase Fair value

increase decrease decrease

Dr. Asset Dr. Loss (pre acq.)(w1) Dr. Asset Dr. Loss (post acq.)(w2(b))
Cr. Gain (pre acq.)(w1) Cr. Asset Cr. Gain (post acq.)(w2(b)) Cr. Asset

For Depreciation: For Depreciation Reversal: For Depreciation: For Depreciation Reversal:
Dr. Dep Exp (Post RE(w2(b))) Dr. Asset Dr. Dep Exp (Post RE(w2(b))) Dr. Asset
Cr. Asset Cr. Dep (Post RE(w2(b))) Cr. Asset Cr. Dep (Post RE(w2(b)))

OTHER FAIR VALUE ADJUSTMENTS:

1.Intangible asset of subsidiary at acquisition date (whether recognized or not) should be recognized at its
FAIR VALUE at acquisition date.

Dr. Intangible asset xxx

Cr. Gain (Pre)(w1) xxx
Amortization:

Dr. Amortization (post) (w2(b)) xxx

Cr. Intangible asset xxx

2.Contingent liability of subsidiary at acquisition date should be recognized at its FAIR VALUE.
Many acquired businesses will contain contingent liabilities such as contingent liabilities for the settlement of legal
disputes or for warranty liabilities. IFRS 3 states that contingent liabilities should be recognised at acquisition ‘even if it is
not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.’ The
contingent liabilities should be measured at fair value at the acquisition date. (Contingent assets are not recognised).

Dr. Expense (Pre) xxx

Cr. Contingent liability xxx

POST ACQUISITION MOVEMENTS:

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 6

Increase - Dr. Expense (Post) xxx
Cr. Cont. Liability xxx

Decrease - Dr. Cont. liability xxx

Cr. Income xxx

Note Restructuring costs

An acquirer should not recognise a liability for the cost of restructuring a subsidiary or for any other costs expected to
be incurred as a result of the acquisition (including future losses).
This is because a plan to restructure a subsidiary after an acquisition cannot be a liability at the acquisition date. For
there to be a liability (and for a provision to be recognised) there must have been a past obligating event. This can only
be the case if the subsidiary was already committed to the restructuring before the acquisition.
This means that the acquirer cannot recognise a provision for restructuring or reorganisation at acquisition and then
release it to profit and loss in order to ’smooth profits’ or reduce losses after the acquisition.

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 7

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 8
Example 2 Followings are the statement of financial position at 31 December 2011 for P ltd and S ltd

P ltd S ltd
Non-current asset 200 300
Investment in subsidiary 350
Current asset 150 150
TOTAL 700 450
Share Capital @1 Rs. 200 50
Retained earnings 250 200
Other components of equity 150 100
Liabilities 100 100
Total 700 400

1 P ltd acquired 40 ordinary shares of S ltd on 1 January 2010 and retained earnings and other
components of S ltd were Rs.100 and Rs.60 at that date
2 Fair value of subsidiary asset at acquisition date not adjusted in subsidiary individuals’ financial
statements
All values are Rs.
Carrying value Fair value remaining life at acquisition exist at year end
Land 70 100 N/A yes
Building 80 120 20 years yes
Inventory 10 7 N/A No

3 FVTOCI investment of parent & subsidiary increase by Rs.30 & Rs.20 respectively at the year-end
4 Goodwill is impaired by 20% and 10% of its original value in the year ended 31 December 2010 and 31
December 2011 respectively

Required: Prepare consolidated statement of financial position.

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 9

 Unrealized profit Adjustment

* (URP on unsold goods only)

Sale of inventory

Parent seller Subsidiary seller

Dr.Profit(CRE)(w2(a)) Dr. Profit (Sub. post)(w2(b))

Cr. Inventory Cr. Inventory

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 10

 Sale of Non-Current
Assets

Parent seller Subsidiary seller

Dr.Profit(CRE)(w2(a)) Dr. Profit (Sub. post)(w2(b))

Cr. Asset Cr. Asset

Dr.Asset Dr. Asset

Cr. Reversal of dep(w(2(b)) Cr. Reversal of dep(w2(a))

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 11

Example 3

Followings are the statement of financial position at 31 December 2011 for P ltd and S ltd

P ltd S ltd
Non-current asset 250 300
Investment in subsidiary 350
Current asset 100 100
TOTAL 700 400
Share Capital 100 50
Retained earnings 350 200
Other components of equity 150 100
Liabilities 100 50
Total 700 400

1 P ltd acquired 40 ordinary shares of S ltd on 1 January 2010 and retained earnings and other
components of S ltd were Rs.100 and Rs.60 at that date
2 Fair value of subsidiary asset at acquisition not adjusted in subsidiary individuals’ financial statements
All values are Rs.
Carrying value Fair value remaining life at acquisition exist at year end
Land 70 100 N/A yes
Building 80 60 20 years yes
Inventory 10 15 N/A No
3 Goodwill is impaired by 20% and 10% of its original value in the year ended 31 December 2010 and 31
December 2011 respectively
4 FVTPL investment of parent & subsidiary increase by Rs.30 & Rs.20 respectively at the year-end
5 Parent sold goods to subsidiary and unrealized profit on these goods were Rs.20. 40% are still held in
subsidiary books at year end .

Required: Prepare consolidated statement of financial position at 31 December 2011.

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 12

 Intra group
Receivables/Payables
(current A/C's)

Balances are Balances are

same different

Dr. Payables Cash in transit

Errors
Cr. Receivables Goods in transit

Dr. Cash/Goods
Cr.Reveivables
Receipient books or
Parent books

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 13

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 14
 Intra group loan/Investment

Dr. Loan/Preference share liablity

Cr. Investment

Illustration A

Statement of financial position as at 31 December 20X4:

Alpha Beta
Rs. Rs.
Investment in Beta (at cost) 19,000 -
Beta current account 10,000 -
cash at bank 20,000 28,000
Other sundry assets 41,000 16,000
Total assets 90,000 44,000

Share capital (Rs. 1 Ord.) 50,000 10,000

Retained earnings 30,000 20,000
Current liabilities 10,000 5,000
Alpha current account - 9,000
Total equity and liabilities 90,000 44,000

a. The current account difference has arisen as a cheque of Rs. 500 sent by Beta to Alpha on 30 December 2014
was not received by Alpha until 3 January 2015, Rs. 300 purchases by Beta from Alpha wrongly credited to some
other creditor account and Rs. 200 charged by Alpha for certain expenses paid on behalf of Beta.

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 15

Example 4

P ltd S ltd
Non-current asset 250 300
Investment in subsidiary 350
Current asset 100 100
TOTAL 700 400
Share Capital 100 50
Retained earning 350 200
Other components of equity 150 100
Liabilities 100 50
Total 700 400

1 P ltd acquired 70% of S ltd and at acquisition retained earnings and other components of equity of S ltd
were Rs.90 and Rs.70
2 Fair value of subsidiary asset increases by Rs.110 at acquisition date &depreciation is Rs.10
3 FVTOCI investment of parent & subsidiary decrease by Rs.30 & Rs.20 respectively at the year-end
4 Subsidiary sold goods and unrealized profit at year end is Rs.20
5 Fair value of Non-controlling interest at acquisition date was Rs.120
6 Impairment loss on goodwill is Rs.10

Required: Prepare consolidated statement of financial position.

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 16

 Example-5

You are provided with the following statements of financial position (balance sheets) for Shark and Minnow.

STATEMENTS OF FINANCIAL POSITION AS AT 31 OCTOBER 20X0

Shark Minnow
Rs.'000 Rs.'000 Rs.'000 Rs.'000
Non-current assets, at net book value
Plant 325 70
Fixtures 200 50
525 120
Investment
Shares in Minnow at cost 200
Current assets
Inventory at cost 220 70
Receivables 145 105
Bank 100 0
465 175
1,190 295
Equity
Rs.1 Ordinary shares 700 170
Retained earnings 215 50

Current liabilities
Payables 275 55
Bank overdraft 0 20
275 75
1,190 295
The following information is also available.

(a) Shark purchased 70% of the issued ordinary share capital of Minnow four years ago, when the
retained earnings of Minnow were Rs.20,000. There has been no impairment of goodwill.

(b) For the purposes of the acquisition, plant in Minnow with a book value of Rs.50,000 was revalued to
its fair value of Rs.60,000. The revaluation was not recorded in the accounts of Minnow. Depreciation
is charged at 20% using the straight-line method.

(c) Shark sells goods to Minnow at a markup of 25%. At 31 October 20X0, the inventories of Minnow
included Rs.45,000 of goods purchased from Shark.

(d) Minnow owes Shark Rs.35,000 for goods purchased and Shark owes Minnow Rs.15,000.

(e) It is the group's policy to value the non-controlling interest at fair value.

(f) The market price of the shares of the non-controlling shareholders just before the acquisition was
Rs.1.50.

Required: Prepare the consolidated statement of financial position of shark as at 31 October 20X0.

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 17

CONSOLIDATION - FORMS OF CONSIDERATION:

1) “Cash”

Dr. Investment in subsidiary xxx

Cr. Cash xxx

2) “Issue of shares”

Dr. Investment in subsidiary* xxx

Cr. Share capital xxx
Cr. Share premium xxx

*(no. of shares issued by parent x Market value of parent’s share)

3) “Issue of loan notes”

Dr. Investment in subsidiary xxx

Cr. Loan xxx

4) “Deferred Consideration”

Dr. Investment in Subsidiary xxx (present value)

Cr. Deferred liability xxx (present value)

Unwinding of interest (Liability x interest rate)

Dr. Interest Expense xxx (CRE)

Cr. Deferred Liability xxx

5) “Contingent Consideration”

“Consideration dependent on certain future events or future performance targets”

Criteria:

 Fair value can be measured reliably. And probability will not be seen for recognition

Dr. Investment in Subsidiary xxx (Fair value)

Cr. Contingent Consideration xxx

“Further movement in contingent consideration depends on”

a) “Settlement in cash/other consideration”

Further movement will be charged to P&L (CRE)(w2(a))

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 18

 b) “Settlement in shares”
No further movement will be recognized

6)” Other assets “

PPE, Investment property, and any other asset Transferred in exchange of Subsidiary shares

Dr. Investment in Subsidiary xxx (Fair value)

Cr. Asset carrying value xxx
Dr/Cr loss /Profit on disposal xxx/xxx

Not forms of consideration

Share options given to the previous owners

When an entity acquires a subsidiary that was previously managed by its owners, the previous owners might
be given share options in the entity as an incentive to stay on and work for the subsidiary after it has been
acquired. IFRS 3 states that the award of share options in these circumstances is not a part of the purchase
consideration. The options are post-acquisition employment expenses and should be accounted for as share-
based payments in accordance with IFRS 2.

Costs of acquisition: transaction costs Transaction costs incurred in making an acquisition, such as the cost of
the fees of advisers and lawyers, must not be included in the cost of the acquisition.

These costs must be treated as an expense as incurred and written off to profit or loss.

The amount of transaction costs associated with an acquisition and written off during the period to profit or
loss must be disclosed in a note to the financial statements

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 19

Example A:

P Ltd. acquired 80% of S Ltd.’s equity shareholding. Share capital of S Ltd is Rs.125,000 @ Rs.20 each share.
P Ltd:
1) Paid cash of Rs.30 per share acquired
2) issued Rs.100 @ 6% loan note for every 600 shares acquired
3) issued its 3 ordinary shares for every 5 shares of subsidiary:
-Share price of P ltd @ acquisition Rs.25 each
-Share price of S ltd @ acquisition Rs.35 each
4) Promised to pay Rs.300,000 after 2 years
-Interest rate is 10%
Required:
Calculate the total amount of consideration.

Example B:

Beta Co. acquired 70% of XYZ Co.’s shareholding. XYZ’s share capital is Rs.40,000 @ Rs.10 each share.
Beta Co.:
1) Paid cash of Rs.5 for each share acquired (Rs.14000)
2) Issued Rs.500 @ 8% loan notes for every 400 shares acquired (Rs.3500)
3) Issued its 2 ordinary shares for every 3 shares of XYZ Co. (Rs.59733)
-share price of Beta Co. @ acquisition Rs.32 each
-share price of XYZ Co. @ acquisition Rs.45 each
4) Promised to pay Rs.90,000 after 1 year. Interest rate prevailing in the market is 10% (Rs.81818)

Required:
Calculate the total amount of consideration.

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 20

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 21
Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 22
IAS-28 Investment in associate

SIGNIFICANT INFLUENCE

EQUITY METHOD:
Rs.'000
Cost (Pre + goodwill) xxx
Add: Share of post acq. Share xxx
Less: Impairment loss (xxx)
Add: BPG xxx
Less: URP if parent seller (xxx)
Investment in associate xxx SOFP(NCA)

W1 - S HARE OF POST ACQUISITION RESERVE

Dr. Investment in associate xxx

Cr. CRE/Cons. OCE xxx

W2 – IMPAIRMENT LOSS ON INVESTMENT IN ASSOCIATE

Dr. Impairment loss (CRE) xxx

Cr. Investment in associate xxx

W3 – DIVIDEND RECEIVED FROM ASSOCIATE

Dr. Cash xxx

Cr. Investment in associate xxx

W4 – URP WITH ASSOCIATE

Only parent share of URP:

PARENT SELLER ASSOCIATE SELLER

Dr. Profit (CRE) xxx Dr. Profit (CRE) xxx

Cr. Investment in associate xxx Cr. Inventory xxx

Downstream transaction (P A) upstream transaction (P A)

(Inventory held with associate, and associate’s inventory cannot be consolidated therefore Investment in associate is
credited instead of inventory)

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 23

URP:

Dr. Profit xxx

Cr. Inventory xxx

EXAMPLE :

P Co, a company with subsidiaries, acquires 25,000 of the 100,000 Rs.1 ordinary share in A Co for Rs.60,000 on 1 January
20X8. In the year to 31 December 20X8, A Co earns profits after tax of Rs.24,000, from which it declares a dividend of
Rs.6,000.

How will A Co's results be accounted for in the consolidated accounts of P Co for the year ended 31 December 20X8?

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 24

Zubair Saleem AAFR notes Consolidation -SOFP (Basic) & IAS 28 25