Chapter 24 • Cancellation and part-

cancellation
The consolidated • Goodwill
statement of financial • Non-controlling interests
• Intra-group trading
position
Syllabus learning outcomes 1
• Describe the components of and prepare a consolidated
statement of financial position or extracts thereof including:
— Fair value adjustments at acquisition on land and
buildings (excluding depreciation adjustments)
— Fair value of consideration transferred from cash
and shares (excluding deferred and contingent
consideration)
 Syllabus learning outcomes 2
— Elimination of intra-group trading balances (excluding cash and goods in transit)
— Removal of unrealised profit arising on intra-group trading
 Syllabus learning outcomes 3
— Acquisition of subsidiaries part way through the financial year
 Syllabus learning outcomes 4
• Calculate goodwill (excluding impairment of goodwill) using the full goodwill method
only.
Overview
Approach to consolidated
statement of financial Mid-year acquisition
position

Consolidated statement of
Financial position

Non-controlling
Goodwill Fair values
interest
intra-group
trading
Other reserves
 Cancellation and part-cancellation 1
Cancellation
When preparing a simple consolidated statement of financial position:
• Take the individual accounts of the parent company and the subsidiary and cancel out
items which appear as an asset in one company and a liability in another.
• Add together all the uncancelled assets and liabilities throughout the group.
 Cancellation and part-cancellation 2
Part cancellation
• An item may appear at differing amounts in the parent's and subsidiary's statement of
financial position.
• The subsidiary's shares may have been acquired at a price other than nominal value,
raising the issue of goodwill.
• The parent may not have acquired all of the shares of the subsidiary, raising the issue
of non-controlling interests.
 Goodwill 1
Goodwill
• Goodwill arises when the parent pays more for their investment than the par value of
the shares they acquire.
 Goodwill 2
• Any pre-acquisition reserves of a subsidiary company are not aggregated with the
parent company's reserves in the consolidated statement of financial position.
 Goodwill 3
• Goodwill is recognised as an intangible asset in the consolidated SOFP.
Goodwill 4
Goodwill working
$ $
Fair value of consideration transferred X
Fair value of NCI at acquisition X
Less net acquisition-date fair value of
identifiable
Assets acquired and liabilities assumed:
Ordinary share capital X
Share premium X
Retained earnings at acquisition X
Fair value adjustments at acquisition X
(X)
Goodwill X
 Tackling the exam
Exam focus point:

You are highly likely to get a question requiring the calculation of goodwill in your exam
so make sure you understand this section fully.

The examiner has highlighted the calculation of goodwill as a topic answered poorly in
the exam.
 Non-controlling interests 1
Non-controlling interest
• Shows the extent to which net assets controlled by the group are owned by other
parties.
 Non-controlling interests 2
Non-controlling interest
• SOFP – equity
Fair value of NCI at acquisition X
Plus NCI's share of post acq'n ret'd earnings X
NCI at reporting date X
Non-controlling interests 3

Retained earnings
PCo SCo
$ $
Per question X X
Adjustments (unrealised profit attribute to P Co) (X)
Pre-acquisition retained earnings (X)
Y
Group share of post-acq'n ret'd Earnings S Co (Y × %) X
Group retained earnings X
 Non-controlling interests 4
Non-controlling interest
• NCI share of retained profits = Y × NCI%
 Intra-group trading 1
Intra-group trading
Unrealised profit will arise on intra-group transactions where the inventory is still held at
the reporting date:
(1) Work out which company made the profit.
(2) Calculate the provision for unrealised profit (PUP).
(3) For consolidation purposes, eliminate the profit from inventory, consolidated
retained earnings and NCI (if required).
 Intra-group trading 2
• If P sells to S, the unrealised profit lies in P's books:

DEBIT Consolidated SPL (whole profit loading)

CREDIT Group inventory
 Intra-group trading 3
• If S sells to P, the unrealised profit lies in S's books and must be shared between P and
the NCI:

DEBIT Consolidated SPL (P's share)

DEBIT Non-controlling interest (NCI's share)
CREDIT Group inventory
 Lecture example 1
• Pogo acquired the entire share capital of Stick for $8m on 1 February 20X0 when the
statements of financial position of the two companies were as follows.
Lecture example 1 (cont'd)
Pogo Stick
$'000 $'000
Investment in Stick 8,000 –
Other assets 9,500 6,500
17,500 6,500

Share capital 9,000 3,000

Retained earnings 6,000 2,000
15,000 5,000
Liabilities 2,500 1,500
17,500 6,500
 Lecture example 1 (cont'd)
Required
Prepare the consolidated statement of financial position of the Pogo group as at 1
February 20X0.
Answer to lecture example 1

Pogo Group – Consolidated statement of financial position

as at 1 February 20X0
$'000
Goodwill (W2) 3,000
Other assets [9,500 + 6,500] 16,000
19,000
Share capital [Pogo only] 9,000
Retained earnings (W3) 6,000
15,000
Liabilities [2,500 + 1,500] 4,000
19,000
Answer to lecture example 1 (cont'd)
1 Group structure

Pogo
1.2.X0 100%
Pre-acquisition ret'd earnings $2m
Stick

2 Goodwill
$'000 $'000
Consideration 8,000
Non-controlling interest 0
Net assets at acquisition represented by:
Share capital 3,000
Retained earnings 2,000
(5,000)
Goodwill arising on acquisition 3,000
Answer to lecture example 1 (cont'd)

3 Retained earnings
Pogo Stick
$'000 $'000
Per question 6,000 2,000
Pre-acquisition retained earnings (2,000)
0
Group share of post acquisition earnings:
Stick (0 × 100%) 0
6,000
 Lecture example 2
• Pop acquired 75% of the issued share capital of Snap on 1 January 20X8 when Snap
had a retained earnings balance of $1m.
• The fair value of the non-controlling interest at that date was $1.5m.
• One year later the two companies had the following statements of financial position.
Lecture example 2 (cont'd)

Pop Snap
$'000 $'000
Investment in Snap 6,000 –
Other assets 10,500 9,200
16,500 9,200
Share capital 10,000 4,000
Retained earnings 1,500 2,200
11,500 6,200
Liabilities 5,000 3,000
16,500 9,200
 Lecture example 2 (cont'd)
Required
Produce the consolidated statement of financial position of Pop and its subsidiary as at
31 December 20X8.
Answer to lecture example 2
Pop Group – Consolidated statement of financial position
as at 31 December 20X8
$'000
Goodwill (W2) 2,500
Other assets [10,500 + 9,200] 19,700
22,200

Share capital [P only] 10,000

Retained earnings (W3) 2,400
12,400
Non-controlling interest (W4) 1,800
14,200
Liabilities [5,00 + 3,000] 8,000
22,200
Answer to lecture example 2 (cont'd)
Workings
1 Group structure
Pop
1.1X8 75%
Pre-acquisition ret'd earnings $1m
Snap

2 Goodwill
$'000 $'000
Consideration 6,000
Non-controlling interest 1,500
Net assets at acquisition represented by:
Share capital 4,000
Retained earnings 1,000
(5,000)
Goodwill arising on acquisition 2,500
Answer to lecture example 2 (cont'd)
3 Retained earnings
Pop Snap
$'000 $'000
Per question 1,500 2,200
Pre-acquisition retained earnings (1,000)
1,200
Group share of post acquisition earnings:
Snap (1,200 × 75%) 900
2,400
4 Non-controlling interest
$'000
NCI at acquisition (W2) 1,500
NCI share of post acquisition earnings ((W3) 1,200 × 25%) 300
1,800
 Lecture example 3
X acquired 300,000 of Y's 400,000 $1 ordinary shares on 1 January 20X5 when Y's
retained earnings were $500,000. The fair value of the non-controlling interest in Y at
that date was $280,000.
The purchase consideration comprised:
• $250,000 in cash payable at acquisition
• New shares issued in X on a 1 for 3 basis
The quoted price of X's shares on the acquisition date was $7.35.
 Lecture example 3 (cont'd)
The fair value of Y's land and buildings at 1 January 20X5 was $160,000 but the book
value was only $100,000. All other net assets had a fair value equivalent to their book
value.
 Lecture example 3 (cont'd)
Required
Calculate the goodwill arising on acquisition of Y.
Answer to lecture example 3
Goodwill
$ $
Fair value of consideration
Cash 250,000
Shares [(1/3 × 300,000) × $7.35] 735,000
985,000
Fair value of non-controlling interest 280,000
Les: Fair value of net assets at acq'n
Share capital 400,000
Retained earnings 500,000
Fair value adjustment (160,000 – 100,000) 60,000
(960,000)
Goodwill at acquisition 305,000
Answer to lecture example 3 (cont'd)

Workings
1 Group structure
X
1.1.X5 300/400 = 75%
Pre-acquisition ret'd earnings $500,000
Y
 Lecture example 4
• Poach acquired 60% of the share capital of Steal on its incorporation. The statements
of financial position of the two companies as at 31 December 20X8 are as follows.
Lecture example 4 (cont'd)
Poach Steal
$'000 $'000
Non-current assets
Property, plant and equipment 200 50
Investment in Steal 6
206 50
Current assets
Inventories 22 18
Receivables – from Poach – 30
– other 96 29
Cash 4 15
122 92
328 142
Lecture example 4 (cont'd)

Equity
Share capital 100 10
Retained earnings 147 73
247 83
Current liabilities
Trade payables – to Steal 30 –
– other 51 59
81 59
328 142
 Lecture example 4 (cont'd)
Notes
(i) The fair value of the non-controlling interest in Steal at acquisition was
$4,000.
(ii) Steal sells goods to Poach at a profit margin of 25% on selling price. At the year
end, $12,000 of the goods that Poach had purchased from Steal remained in
inventories.
 Lecture example 4 (cont'd)
Required
Prepare a consolidated statement of financial position as at 31 December 20X8.
Answer to lecture example 4
Poach Group – Consolidated statement of financial position as at 31 December 20X8
$'000
Non-current assets
Property, plant and equipment (200 + 50) 250

Current assets
Inventories (22 + 18 – (W4) 3) 37
Receivables – from Poach (30 – 30) –
– other (96 + 29) 125
Cash (4 + 15) 19
181
431
Equity attributable to the owners of the parent
Share capital 100
Retained earnings (W2) 189
289
Non-controlling interest (W3) 32
321
Current liabilities
Trade payables – to Steal (30 – 30) –
– other (51 + 59) 110
431
Answer to lecture example 4 (cont'd)
Workings
1 Group structure
Poach
On incorporation 60% \non-controlling interest 40%
(\no goodwill)
Pre-acquisition ret'd earnings $0
Steal

2 Consolidated retained earnings

Poach Steal
$'000 $'000
Per question 147 73
Provision for unrealised profit (PUP) (W4) (3)
Pre-acquisition retained earnings (0)
70
Group share of post acquisition retained earnings:
Steal (70 × 60%) 42
189
Answer to lecture example 4 (cont'd)
3 Non-controlling interest
$'000
NCI at acquisition 4
NCI share of post acquisition retained earnings ((W2) 70 × 40%) 28
32

4 Provision for unrealised profit

On consolidation:
Profit element in inventories:
$12,000 × 25% = $3,000
\ DR Steal's retained earnings $3,000
CR Group inventories $3,000
 Lecture example 5
• Pat acquired 80% of the issued share capital of Slap on 30 September 20X7. The share
price for each of the non-controlling interest shares in Slap was $4.50 at the acquisition
date.
• At the year end 31 December 20X7 the two companies have the following statements
of financial position:
Lecture example 5 (cont'd)
Pat Slap

$'000 $'000 $'000 $'000

Investment in Slap 4,000 –

Other assets 10,500 6,000

14,500 6,000
Lecture example 5 (cont'd)
Share capital ($1 shares) 6,000 1,000
Share premium – 500
Retained earnings
1 Jan 20X7 4,000 1,500
Profit for 20X7 2,000 1,000
6,000 2,500
12,000 4,000
Liabilities 2,500 2,000
14,500 6,000
 Lecture example 5 (cont'd)
Required
Calculate the goodwill at the date of acquisition.
Answer to lecture example 5
$'000 $'000
Consideration transferred 4,000
Non-controlling interest (1,000 × 20% × $4.50) 900

Net assets at acquisition as represented by:

Share capital 1,000
Share premium 500
Retained earnings (W2) 2,250
(3,750)
Goodwill 1,150
Answer to lecture example 5 (cont'd)
Workings
1 Group structure
Pat
30.9.X7 80%
Pre-acquisition ret'd earnings – see W2
Slap

2 Slap – retained earnings 30.9.X7

$'000
Retained earnings at 1.1.X7 1,500
9 750
For the 9 months to 30.9.X7 (1,000 × )
12
Retained earnings at 30.9.X7 2,250
Chapter summary 1
1 Approach to consolidated financial position
 In the exam, a methodical approach to consolidation is key.
Chapter summary 2
2 Goodwill
 Positive goodwill is capitalised as an intangible non-current
asset. 'Negative' goodwill (once reassessed to ensure it is
accurate) is recognised as a bargain purchase in the profit or
loss.
Chapter summary 3
3 Fair values
 In order for the goodwill figure to be accurately measured,
both the consideration transferred and the fair value of the
assets acquired and liabilities assumed must be recognised at
fair value at the date of acquisition.
Chapter summary 4
4 Other reserves
 Other reserves, eg a revaluation surplus, are calculated using
the same process as retained earnings, ie only post-
acquisition reserve movements are consolidated.
Chapter summary 5
5 Non-controlling interest
 Non-controlling interest shows the amount of the assets and
liabilities under the control of the parent, but which are not
owned by the parent's shareholders.
Chapter summary 6
6 Intra-group trading
 At the year end, intra-group payables and receivables must be
eliminated.
 Unrealised profit in year end inventories from intra-group
trading must be eliminated by reducing inventories and the
seller's retained earnings.
Chapter summary 7
7 Mid-year acquisitions
 Only post-acquisition profits are consolidated. Therefore, if
the acquisition is mid-year, a retained earnings figure must be
estimated for the goodwill and retained earnings calculations.