FR - Consolidation Workings

FR – Consolidation workings
Contents
Goodwill and Negative Goodwill – Module 1 ........................................................................ 3
COMPUTATION OF GOODWILL: ......................................................................................... 3
COMPUTATION OF NEGATIVE GOODWILL: ........................................................................ 4
CONSOLIDATION OF STATEMENT OF FINANCIAL POSITIONS: ........................................... 5
Consolidation Workings (Goodwill and Negative Goodwill Examples – Part 1) .................... 6
Consolidation Workings (Goodwill and Negative Goodwill Examples – Part 2) .................. 11
Non-Controlling Interest – Module 2 ................................................................................... 28
NON-CONTROLLING INTEREST CALCULATION: ................................................................ 28
1. THE PROPORTION OF NET ASSETS METHOD: ............................................................... 28
2. FAIR VALUE METHOD: .................................................................................................. 29
IMPORTANT NOTES: ......................................................................................................... 30
Consolidation Workings (Non-Controlling Interest Examples – Part 1)............................... 31
Consolidation Workings (Non-Controlling Interest Examples – Part 2)............................... 38
Deferred and Contingent Consideration – Module 3 .......................................................... 44
DEFERRED CONSIDERATION: ............................................................................................ 44
CONTINGENT CONSIDERATION: ....................................................................................... 44
Dealing with Intra-Group Trading – Module 4 ..................................................................... 46
INTRA-GROUP TRADING: .................................................................................................. 46
INTRA-GROUP TRADING TYPES: ....................................................................................... 46
INTRA-GROUP RECEIVABLES AND PAYABLES: .................................................................. 48
Consolidation Workings (Dealing with Intra-Group Trading – Part 1) ................................. 49
Consolidation Workings (Dealing with Intra-Group Trading – Part 2) ................................. 54
Consolidation Workings (Dealing with Intra-Group Trading Examples – Part 3)................. 60
Consolidation Workings (Dealing with Intra-Group Trading Examples – Part 4)................. 65
1
Comprehensive Income Consolidation (Part 1) – Module 5 ................................................ 67
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME: ......................................... 67
INTRA-GROUP SALES: ....................................................................................................... 67
Comprehensive Income Consolidation (Part 2) – Module 6 ................................................ 69
OTHER ADJUSTMENTS IN CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME: 69
Subsidiary Disposals ............................................................................................................. 71
DISPOSAL WITH RETAINING EQUITY INVOLVEMENT: ...................................................... 71
DISPOSAL OF SUBSIDIARIES AS DISCONTINUED OPERATIONS:........................................ 71
IAS 28 (Module 1) - Definitions and Equity Method Basics ................................................. 72
DEFINITIONS ..................................................................................................................... 72
TREATMENT OF ASSOCIATE IN THE CONSOLIDATED FINANCIAL STATEMENT ................ 72
Investment in Associate IAS 28 ............................................................................................ 74
IAS 28 Investments in Associates and Joint Ventures - Module 3 ....................................... 76
TRADING WITH ASSOCIATES: ........................................................................................... 76
IFRS 11 and IAS 27 ................................................................................................................ 78
IFRS 11 Definitions ............................................................................................................ 78
IFRS 27 .............................................................................................................................. 79
2
Goodwill and Negative Goodwill – Module 1
COMPUTATION OF GOODWILL:
Goodwill is computed following below steps:
− A cost of control account is opened.
− Investment in a subsidiary is debited into the control account.
− Share capital of subsidiary is credited into the control account.
− Retained earnings of subsidiary (and other capital reserves) are credited into the control
account.
− Usually, the debit side of the account will be higher than the credit.
− This amount corresponds to the excess of the purchase price over the net assets of the
acquired subsidiary and is referred to as goodwill.
− A typical cost of control is shown below:
3
COMPUTATION OF NEGATIVE GOODWILL:
− In circumstances where the fair value of net assets of the subsidiary are more than the
amount paid for the acquisition, IFRS 3 requires that the assessment of the fair values of
the investee’s assets and liabilities be reviewed for potential misstatements.
− If following such a review, the cost of the investment still remains below the net asset
fair value, the difference is credited to the consolidated income statement as a one-
time gain on a bargain purchase, which is recognised at the date of acquisition.
− The cost of control account in such circumstances will look like:
4
CONSOLIDATION OF STATEMENT OF FINANCIAL POSITIONS:
− The investment in the subsidiary, as reported within the assets of the parent, is
replaced by the subsidiary’s individual assets and liabilities.
− The cost of the investment in the subsidiary is offset against the subsidiary’s share
capital and reserves as at the date of acquisition.
− The share capital reported in the consolidated statement of financial position comprises
of the share capital of the parent company only.
− Goodwill is recognised under non-current assets within the consolidated statement of

financial position.
− Goodwill is not subject to amortization instead, it must be tested for impairment on an

annual basis in accordance with the rules laid out in IAS 38.
− If the acquisition date is same as the reporting date, all the reporting earnings of the
subsidiary are eliminated from the consolidated accounts.
− If the acquisition date before the reporting date, post-acquisition earnings of a

subsidiary are included in the consolidation.
5
Consolidation Workings (Goodwill and Negative Goodwill
Examples – Part 1)
Let us explore a number of worked examples, with the aim of putting together a
comprehensive framework for solving F7 exam consolidation questions.
NOTE:
This will be especially valuable and crucial to those, who received an exemption from the F3
– Financial Accounting paper, and did not, therefore, have an opportunity to get acquainted
with the recommended approach to tackling these problems.
We will not be utilising T-accounts, but rather, for the sake of speed, follow a tabular format
to derive the most crucial items, which you will be required to calculate on the exam.
EXAMPLE:
P acquired the entire share capital of S for €8,000 on the 1st of January 2017, when the
statements of financial position of the two entities were as follows:
P (€) S (€)
Investment in S 8,000 -
Other assets 13,000 10,000
Total assets 21,000 10,000
Share capital 6,000 5,000
Retained earnings 12,000 3,000

Total equity 18,000 8,000
Liabilities 3,000 2,000
Total equity and liabilities 21,000 10,000
Prepare the consolidated statement of financial position of the group as at 1 st of January

2017.
6
WORKING 1 – GROUP STRUCTURE:
The first working pertains to group structure, although in fairness, in this case, it will not
necessarily be too revealing, seeing as P owns 100% of S as at the 1st of January 2017:
It must be stressed, however, that in more complicated scenarios, which you will, no doubt
encounter in the F7 exam, the group structure working will help you get the relevant
percentage ownership proportions right, which are crucial from the point of view of
attributing retained earnings and other reserve capital to various groups of shareholders, as
well as properly accounting for goodwill.
WORKING 2 – SUBSIDIARY’S NET ASSETS:
The second working which we are going to need is called subsidiary net assets. On the left
hand side, we are going to list the two lines that make up the net assets or equity of S, and
that’s share capital and retained earnings. This table is going to feature three data columns,
which we will label:
− Acquisition date
− Consolidation date, and
− Post-acquisition.
Acquisition date Consolidation date Post-acquisition

€ € €
Share capital
Retained earnings
7
In this example, the acquisition and consolidation date are one and the same, we will enter
identical numbers in both the ‘acquisition date’ and ‘consolidation date’ columns, that’s
5,000 in respect of share capital and 3,000 for retained earnings.
€ € €
Share capital € 5,000 5,000 -

Retained earnings 3,000 3,000 0
8,000 8,000 0
The third column, ‘post-acquisition’, is used to compute any movements in reserve capital,
that is retained earnings and, if applicable, revaluation surplus, between the date of
acquisition and the date of consolidation. Seeing as share capital is not of interest to us in
this column, we may put a horizontal line there. There is obviously no difference in the
balance of retained earnings, meaning that no retained earnings have yet been generated in
the subsidiary since the acquisition.
Share capital € 5,000 € 5,000 € -

Retained earnings 3,000 3,000 0
8,000 8,000 0
Before we move on, it is important to stress that the net asset numbers which we input into
this table, should reflect fair values as opposed to book values taken simply from the
subsidiary’s statement of financial position. As you will see in later examples, whenever
those two values differ, appropriate adjustments will need to be made to reflect this fact.
WORKING 3 – GOODWILL:
The third working is called goodwill, and think of this one as the equivalent of the cost of
control account. The computation of goodwill starts with the investment made by the
parent to acquire its stake in the subsidiary, and in this case, that’s the €8,000 taken from
the parent’s standalone statement of financial position. From this we deduct the fair value
of the subsidiary’s net assets as at the date of acquisition, which may, naturally, be taken as
the €8,000 total of the ‘acquisition date’ column from working 2:
Investment in subsidiary: €8,000
Less: fair value of subsidiary’s net assets at acquisition: (€8,000)

Goodwill: Nil
8
Seeing as the subtraction yields a result of zero, we conclude that there is, in fact, no
goodwill arising on this transaction.
WORKING 4 – NON-CONTROLLING INTEREST (NCI):
The fourth working is going to be called non-controlling interest and it will only be relevant
in those cases when the parent entity owns less than 100% of the subsidiary being
consolidated. Now, even though that is not the case in this example, you may be pretty sure
that it will be the case in your F7 exam, so write this down, so as to get used to the structure
of these workings in their entirety.
WORKING 5 – GROUP RETAINED EARNINGS:
And finally, working number five, which we will use to derive the group retained earnings
figure. This kicks off with the entire retained earnings of the parent, giving €12,000, to
which we add the parent’s share of retained earnings generated by the subsidiary since the
acquisition. Recall that as part of working 2, we already identified this number to be zero,
which leaves us with a group retained earnings total of €12,000:
Parent retained earnings: €12,000
Parent’s share of subsidiary’s post acquisition retained earnings: Nil

Group retained earnings: €12,000
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1ST OF JANUARY 2017:
Working five is the last of the standard computations which we will be utilising throughout
the examples, and we are now ready to put together the consolidated statement of financial
position as at the 1 st of January 2017 (the date of acquisition).
As you will surely recall, the Investment in S line is dropped altogether from the group
statement of financial position, so we begin with other assets, which are simply the sum of
the two numbers coming from the books of P and S, so that’s €13,000 and €10,000, giving
€23,000. In light of the fact that there was no goodwill generated upon the transaction, that
result is also the figure for total assets.
Moving on to the equity section, as we previously stressed, the share capital of the group is
always the same as the share capital of the parent, so €6,000. The group retained earnings
total derived in working 5 was €12,000, giving an overall consolidated equity balance of
€18,000.
9
Group liabilities are simply the sum of the relevant P and S numbers, producing €5,000,
which brings the balance of consolidated equity and liabilities to €23,000:
P (€) Notes
Other assets 23,000 (13,000 + 10,000)
Total assets 23,000
Share capital 6,000 Parent’s portion only
Retained earnings 12,000 From working 5
Total equity 18,000
Liabilities 5,000 (3,000 + 2,000)
Total equity and liabilities 23,000
10
In this example, we will be adding an element of earnings retained since the date of
subsidiary acquisition.
EXAMPLE:
statement of financial position of S was as follows:
S (€)
Other assets 10,000

Total assets 10,000
Share capital 5,000
Retained earnings 3,000

Total equity 8,000
Liabilities 2,000
On the 31st of December 2017, the statements of financial position of the two companies
are as follows:
P (€) S (€)
Investment in S 8,000

11
Prepare the consolidated statement of financial position of the group as at 31 st of
December 2017.
The first working concerns group structure, and we will, once again, write that P owns 100%
of S as at the 31st of December 2017, which we have identified as the date of consolidation:
The second working is subsidiary’s net assets, we are going to have the following three
columns as before:

€ € €
Share capital
Retained earnings
So, in the acquisition date column we have 5,000 in respect of share capital and 3,000 for
retained earnings. Moving on to the consolidation date column, we may input the relevant
equity balances of S as at the 31st of December 2017, i.e., €5,000 and €5,500 for share
capital and retained earnings respectively:

€ € €
8,000 10,500
12
The post-acquisition column will show nothing in respect of share capital, but we will use it
to identify the post-acquisition movement in the subsidiary’s retained earnings that is the
difference between the €5,500 (as at the date of consolidation) and the €3,000 (at the point
of acquisition), giving a difference of €2,500:
Share capital € 5,000 € 5,000 € -

Retained earnings 3,000 5,500 2,500
8,000 10,500 2,500
The third working, goodwill, starts with the €8,000 investment by the parent entity and
deduct the €8,000 fair value of the subsidiary’s net assets as at the date of acquisition,
which we take from the ‘acquisition date’ column in working 2. We conclude that there was
no goodwill arising on the transaction:
Investment in subsidiary: €8,000
Less: fair value of subsidiary’s net assets at acquisition: (€8,000)

Goodwill: Nil
At this point it is important to stress that the net assets total used for the purposes of
computing goodwill should always come from the first column of Working 2, that is the
column labelled ‘acquisition date’. Under no circumstances should you ever calculate
goodwill using balances pertaining to the consolidation date.
consolidated. Therefore, we will not be utilising it.
And finally, working number five, which we will use to derive the group retained earnings
figure. We begin with the entire retained earnings of the parent as at the date of
consolidation, giving €17,000, to which we add the parent’s share of retained earnings
generated by the subsidiary since the acquisition. In working 2, we identified that the
retained earnings of S grew by €2,500 since acquisition, and seeing as P owns 100% of S,
that entire growth is attributable to the parent. The group retained earnings total, therefore
comes in at €19,500:
13
Parent retained earnings: € 17,000
Parent’s share of subsidiary’s post acquisition retained earnings: € 2,500
Group retained earnings: € 19,500
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31ST OF DECEMBER 2017:
Let us now put all of the pieces together in the consolidated statement of financial position
as at the 31st of December 2017. We begin with other assets that is the sum of the two
numbers coming from the books of P and S, so that’s €20,000 and €14,000, giving €34,000.
In light of the fact that there was no goodwill generated upon the transaction, that result is
also the figure for total assets.
Moving on to the equity section, the share capital of the group is always the same as the
share capital of the parent, so €6,000. The group retained earnings total derived in Working
5 was €19,500, giving an overall consolidated equity balance of €25,500.
P (€) Notes
Other assets 34,000 (20,000 + 14,000)
Total assets 34,000
Total equity 25,500
Liabilities 8,500 (5,000 + 3,500)
14
Here, we will be dealing with a scenario, in which the date of consolidation coincided with
the date of acquisition, with the addition of fair value adjustments to the subsidiary’s net
assets.
EXAMPLE:
P (€) S (€)

Additionally, at the date of acquisition, the fair value of S’s other assets exceeded their book
value by €600.
Prepare the consolidated statement of financial position of the group as at 1st January
2017.
The first working pertains to group structure, although in fairness, in this case, it will not
necessarily be too revealing, seeing as P owns 100% of S as at the 1st of January 2017:
15
The second working which we are going to need is called subsidiary net assets. This table is
going to feature three data columns, which we will label:
− Acquisition date,
On the left-hand side I will actually have three rows instead of the previous two:
− The first for share capital,
− The second for retained earnings, and
− The third for fair value adjustments relating to S’s other assets.
€ € €
Share capital
Retained earnings
Fair value adjustments
So, in the first column we will have €5,000 in respect of share capital, €3,000 for retained
earnings as well as an additional €600 to bring S’s net assets total to their acquisition date
fair value. Seeing as the consolidation is performed upon acquisition, the second column
repeats the same numbers, with the post-acquisition column showing no movement:
€ € €
Share capital 5,000 5,000 -
Retained earnings 3,000 3,000 -
Fair value adjustments 600 600 -
8,600 8,600 -
The third working, goodwill, begins with the €10,000 investment by the parent entity from
which we need to deduct the €8,600 fair value of the subsidiary’s net assets as at the date of
acquisition, which we take from the ‘acquisition date’ column of working 2. For the first time
in this series of worked examples, we conclude that the transaction did in fact generate
goodwill of €1,400:
16
Investment in subsidiary: € 10,000
Less: fair value of subsidiary’s net assets at acquisition: -€ 8,600
Goodwill: € 1,400
consolidated. Now, even though that is not the case in this example, you may be pretty sure
that it will be the case in your F7 exam, so write this down, so as to get used to the structure
of these workings in their entirety.
This kicks off with the entire retained earnings of the parent, that’s €12,000, to which we
add the parent’s share of retained earnings generated by the subsidiary since acquisition.
Recall that as part of working 2, we already identified this number to be zero, which leaves
us with a group retained earnings total of €12,000:
Parent retained earnings: €12,000
Parent’s share of subsidiary’s post acquisition retained earnings: Nil

Group retained earnings: €12,000
as at the 1st of January 2017. We may this time begin with goodwill, which was computed as
€1,400 in working 3. Next, we have other assets, which equal the sum of the two values
coming from the books of P and S, but also include that €600 of fair value adjustment, which
brings the total to €23,600, resulting in overall assets of €25,000.
The equity section comprises €6,000 in respect of share capital as well as group retained
earnings of €12,000 as derived in working 5, which produces an overall consolidated equity
balance of €18,000.
17
Group liabilities are simply the sum of the relevant P and S numbers, giving €7,000, which
brings the balance of consolidated equity and liabilities to €25,000:
P (€) Notes
Goodwill 1,400 From working 3
Other assets 23,600 (13,000 + 10,000 + 600)
Total assets 25,000
Total equity 18,000
Liabilities 7,000 (5,000 + 2,000)
18
In this example, we will be performing a consolidation that features the follow-on
consequences of fair value adjustments at a date subsequent to the date of acquisition.
EXAMPLE:
S (€)
Other assets 10,000
Total assets 10,000
Share capital 5,000
Total equity 8,000
Liabilities 2,000
At the date of acquisition, S’s other assets included an item of property, plant and
equipment whose fair value exceeded its book value by €600. The item of PPE had a
remaining useful life of four years at that date.
are as follows:
P (€) S (€)

19
Prepare the consolidated statement of financial position of the group as at 31st of
December 2017.
The first working concerns group structure, and we will, once again, write that P owns 100%
of S as at the 31st of December 2017, which we have identified as the date of consolidation:
columns as before:
This time around, we will actually need four rows:
− Share capital,
− Retained earnings,
− Fair value adjustments relating to S’s assets
− Fair value depreciation adjustments.
So, in the first column we will have 5,000 in respect of share capital, 3,000 for retained
earnings, an additional €600 to bring S’s net assets total to their acquisition date fair value
and nothing in respect of fair value depreciation adjustments:
20
€ € €
Share capital 5,000
Fair value adjustments relating to 600
S’s assets
Fair value depreciation adjustments -
8,600
Moving on to the consolidation date column, we may input the relevant equity balances of
S as at the 31st of December, that is 5,000 and 5,500 for share capital and retained earnings
respectively. The fair value adjustment input stays at the same level as at the date of
acquisition, as we are actually only ever concerned with fair value as at that date, meaning
that we will never record any post-acquisition movement in respect of this line.
When it comes to the final row of the working, fair value depreciation adjustments, at the
consolidation date, this will show any additional depreciation which will have been recorded
in the group financial statements as a result of incorporating and initially recognising the
subsidiary’s net assets at their fair values, as opposed to book values, and subsequently
charging depreciation on the basis of these amounts.
The subsidiary’s other assets were initially measured at an amount that was €600 higher
than their book value. Given that at the date of acquisition the remaining useful life of the
item of PPE in question was estimated as four years, then the additional depreciation
charged on a straight-line basis over the one year period since the date of acquisition to the
date of consolidation is calculated as €600 divided by 4 times 1 (€600 x 1/4), which is €150:
€ € €
Fair value adjustments relating to S’s assets 600 600
Fair value depreciation adjustments - (150)
8,600 10,950
21
The post-acquisition column will show nothing in respect of share capital or the initial fair
value adjustments, but we will use it to identify the post-acquisition movement in the
subsidiary’s retained earnings, which is the difference between the €5,500 as at the date of
consolidation and the €3,000 at the point of acquisition, giving a difference of €2,500.
Additionally, we will show the additional depreciation charge of minus 150 which needs to
be recognised for the year passed since the date of acquisition. The post-acquisition column
therefore shows a net movement of €2,350:
Acquisition Consolidation Post-

date
€ date
€ acquisition
€
Fair value adjustments relating to
600 600 -
S’s assets
Fair value depreciation adjustments - -150 -150
8,600 10,950 2,350
which we deduct the €8,600 fair value of the subsidiary’s net assets as at the date of
acquisition, which we take from the ‘acquisition date’ column of working 2, and this yields
goodwill of €1,400:

Goodwill: 1,400
22
We begin with the entire retained earnings of the parent as at the date of consolidation,
giving €17,000, to which we add the parent’s share of the movement in the net assets of S
since the acquisition, as adjusted for the additional depreciation. This is equal to 100% of
the outcome of the post-acquisition column from working 2, which is €2,350. The group
retained earnings total, therefore comes in at €19,350:

Parent’s share of subsidiary’s post acquisition retained earnings: € 2,350
as at the 31st of December 2017. We begin with goodwill, which was computed as €1,400 in
working 3. Next, we have other assets, which equal the sum of the two values coming from
the books of P and S, but also include that €600 of acquisition-date fair value adjustment
less the €150 of additional depreciation, which brings the total to €32,450, resulting in
overall assets of €33,850.
share capital of the parent, so €6,000. The group retained earnings total derived in working
5 was €19,350, giving an overall consolidated equity balance of €25,350.
P (€) Notes
Other assets 32,450 (18,000 + 14,000 + 600 – 150)
Total assets 33,850
Total equity 25,350
Liabilities 8,500 (5,000 + 3,500)
23
In this example, we will be exploring a scenario which leads to the recognition of a gain on a
bargain purchase.
EXAMPLE:
P (€) S (€)
Investment in S 7,500

Additionally, at the date of acquisition, the fair value of S’s other assets exceeded their book
value by €600. Prepare the consolidated statement of financial position of the group as at
1 January 2017.
The first working concerns group structure, and we will write that P owns 100% of S as at
the 1st of January 2017, which we have identified as the date of consolidation:
24
columns as before:
Now, on the left-hand side we have three rows:
− Share capital,
− Retained earnings,
− Fair value adjustments relating to S’s assets

date date acquisition
Share capital
Retained earnings € € €
Fair value adjustments relating to S’s
assets
So, in the first column, we will have €5,000 in respect of share capital, €3,000 for retained
earnings as well as an additional €600 to bring S’s net assets total to their acquisition date
fair value. Seeing as the consolidation is performed upon acquisition, the second column
repeats the same numbers, with the post-acquisition column showing no movement:
Acquisition Consolidation Post-acquisition

date date
Share capital 5,000 5,000 € -
Retained earnings €3,000 € 3,000 -
Fair value adjustments relating to S’s 600 600 -
assets 8,600 8,600 -
25
which we need to deduct the €8,600 fair value of the subsidiary’s net assets as at the date of
acquisition, which we take from the ‘acquisition date’ column of working 2. And for the first
time in this series of worked examples, we find that goodwill comes in at a negative €1,100:

Goodwill (gain on bargain purchase): -1,100
As you may recall from the first video of this module, a negative goodwill result is actually
referred to as a gain on a bargain purchase and ought to be recognised in the consolidated
income statement at the time of acquisition. Let us nevertheless stress, that before any such
gain is actually posted to P/L, the assessment of the fair values of the subsidiary’s net assets
must be reviewed for potential misstatements.
This kicks off with the entire retained earnings of the parent, which is 12,000. Because we
identified the presence of negative goodwill, we must also include an additional €1,100 gain
as part of this working. And finally, as always, we add the parent’s share of retained
earnings generated by the subsidiary since acquisition. Recall that as part of working 2, we
already identified this number to be zero, which leaves us with a group retained earnings
total of €13,100:

Gain on bargain purchase: € 1,100
Parent’s share of subsidiary’s post acquisition retained earnings: -
26
as at the 1st of January 2017.
Seeing as the transaction did not generate any positive goodwill, we begin with other assets,
which equal the sum of the two values coming from the books of P and S, but also include
that €600 of fair value adjustment, which brings the total to €23,600.
The equity section comprises €6,000 in respect of share capital as well as group retained
earnings of €13,100 as derived in working 5, which produces an overall consolidated equity
balance of €19,100.
Group liabilities are simply the sum of the relevant P and S numbers, giving €4,500, which
brings the balance of consolidated equity and liabilities to €23,600.
P (€) Notes
Other assets 23,600 (13,000 + 10,000 + 600)
Total assets 23,600
Total equity 19,100
Liabilities 4,500 (2,500 + 2,000)
27
Non-Controlling Interest – Module 2
NON-CONTROLLING INTEREST CALCULATION:
When dealing with transactions where less than 100% of the share capital is acquired,
goodwill may, in fact, be computed using one of two approaches:
1. THE PROPORTION OF NET ASSETS METHOD:
− Under the proportion of net assets approach, the amount of goodwill recognised
reflects the portion that is attributable to the parent entity only.
− The share capital of subsidiary is credited into the control account according to the
ownership of the parent.
− Retained earnings of subsidiary (and other capital reserves) are credited into the control
account according to the ownership of the parent.
− The amount that corresponds to the excess of the purchase price over the net assets of
the acquired subsidiary is referred to as goodwill.
− The cost of control account will look like
− Non-controlling interest is calculated from the % that is not owned by the parent,
simply by taking this percentage of the share capital and other reserves of the
subsidiary.
28
− Non-controlling interest is presented as:
2. FAIR VALUE METHOD:
− It involves recognising the amount of goodwill attributable to the group as a whole.
− Non-controlling interest fair value is calculated by applying the % not owned by the
parent to the total fair value of the net assets of the subsidiary at the date to the
acquisition.
− In addition to adjusting investment, share capital and other capital reserves, the non-
controlling interest fair value is also debited to the cost of control account when
calculating the goodwill.
− Here the cost of control account looks slightly different:
29
IMPORTANT NOTES:
− Consolidating a less than wholly-owned subsidiary requires that the subsidiary’s assets
and liabilities be added without making any attempts to consolidate only that portion
of their value which is attributable to the parent.
− As a consequence of reporting 100% of the subsidiary’s net assets, the portion that is
not owned by the parent is apportioned to the non-controlling shareholders in a
separate line within the equity section.
− IFRS 3 allows for goodwill measurement choice to be made for each business
combination on a transaction-by-transaction basis, rather than as an accounting policy
choice.
− Any profits made by a subsidiary following its acquisition will have to be apportioned
between the retained earnings of the group and non-controlling interest.
30
Consolidation Workings (Non-Controlling Interest Examples
– Part 1)
In this example, we will apply the proportion of net assets method to compute the goodwill,
which will have an impact on both the computation of goodwill as well as the balance of
non-controlling interest.
EXAMPLE:
P acquired 80% of the share capital of S for €8,000 on the 1stof January 2017, when the
statement of financial
Position of S was as follows:

(€)
Other assets 10,000
Total assets 10,000
Share capital 5,000

Total equity 8,000
Liabilities 2,000
remaining useful life of four years at that date.
31
On the 31stof December 2017, the statements of financial position of the two companies are
as follows:
P (€) S (€)

As at the same date, consolidated goodwill is deemed to be impaired by €300.
Prepare the consolidated statement of financial position of the group as at 31 stof

December 2017.
the 1 stof January 2017, which we have identified as the date of consolidation:
The second working is Subsidiary net assets and, as before, we need the standard three
columns:
We will need four rows:
32
− The second for retained earnings,
− The third for fair value adjustments relating to S’s assets, and
− The fourth for fair value depreciation adjustments.
earnings, and additional €600 to bring S’s net assets total to their acquisition date fair value

date
€ date
€ acquisition
€
Share capital
Retained earnings
Fair value adjustments relating to S’s
assets
Fair value depreciation adjustments
Moving on to the consolidation date column, we may input the relevant equity balances of S
as at the 31 stof December, that is €5,000 and €5,500 for share capital and retained earnings
acquisition.
The final row of the working, fair value depreciation adjustments, presents any additional
depreciation which will have been recorded in the group financial statements as a result of
incorporating and initially recognising the subsidiary’s net assets at their fair values, as
opposed to book values, and subsequently charging depreciation on the basis of these
amounts.
item of PPE in question was estimated as 4 years, then the additional depreciation charged
on a straight-line basis over the one year period since the date of acquisition to the date of
consolidation is calculated as 600 divided by 4 times 1, which is €150:

date
€ date
€ acquisition
€
Fair value adjustments relating to S’s 600 600
assets
Fair value depreciation adjustments - -150
8,600 10,950
33
Additionally, we will show the additional depreciation charge of minus €150 which needs to
be recognised for the year passed since the date of acquisition. The post-acquisition column,
therefore, shows a net movement of €2,350:

date
€ date
€ acquisition
€
600 600 -
S’s assets
8,600 10,950 2,350
The third working, goodwill, begins with the €8,000 investment by the parent entity.
Because this time around, the parent owns less than 100% of S’ share capital, we add an
extra line for the non-controlling interest or NCI value at acquisition. Under the proportion
of net assets method adopted for the purpose of this video, this is equal to the NCI’s
percentage ownership of S, that’s 20%, times the fair value of S’ net assets at acquisition, as
derived in the first column of working 2, namely, €8,600, producing a result of 1,720. The
two numbers are then added, giving a total of €9,720 from which we deduct the 8,600 fair
value of the subsidiary’s net assets as at the date of acquisition, which we take from the
‘acquisition date’ column of working 2, and this yields a ‘goodwill on acquisition’ balance of
€1,120.
P’s investment in subsidiary(provided): €8,000
NCI value at acquisition(20% x €8,600): €1,720

€9,720
Less: fair value of subsidiary’s(provided) (€8,600)
Goodwill on acquisition: €1,120
34
The scenario tells us that at the date of consolidation, goodwill is in fact impaired by €300,
meaning that its carrying amount as at the 31st of December 2017 equals €820:
P’s investment in subsidiary(provided): €8,000
NCI value at acquisition(provided): €1,720

€9,720
Less: Impairment of goodwill(provided) (€300)
Goodwill on 31st Dec 2017: €820
The fourth working relates to non-controlling interest and we will, for the first time, actually
make use of it. It begins with the Non Controlling Interest value at acquisition, and that’s the
€1,720 already identified as part of working 3.
To this we must add the NCI’s share of the subsidiary’s post-acquisition reserves and that’s
20% of the post-acquisition column total from working 2, so 20% of 2,350, which gives
another €470.
It is important to stress that when goodwill is computed under the proportion of net assets
approach, as is the case in this example, non-controlling Interest is not charged with any
share of goodwill impairment, which is fully allocated to Group retained earnings.
Accordingly, the consolidation date NCI balance equals €2,190

NCI value at acquisition (provided): € 1,720
NCI share of post-acquisition reserves [€2,350 (W2) x 20%]: € 470
NCI balance: € 2,190
35
The fifth and final working, group retained earnings, begins with the entire retained
earnings of the parent as at the date of consolidation, giving €17,000, to which we add the
parent’s share of the movement in the net assets of S since the acquisition, as adjusted for
the additional depreciation. This is equal to 80% of the outcome of the post-acquisition
column from working 2, which is €1,880. As noted already, we must also deduct the parent’s
share of the goodwill impairment charge, which under the proportion of net assets
approach is 100% resulting in a minus 300, which brings the group retained earnings balance
to €18,580:
Parent retained earnings (provided): € 17,000

Parent’s share of subsidiary’s post-acquisition [€2,350 (W2) x 80%]: € 1,880
Less: Parent share of impairment [€300 (provided)]: -€ 300
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31STOF DECEMBER 2017:
as at the 31 stof December 2017. We begin with goodwill, which was computed as €820 in
overall assets of 33,270.
5 was €18,580, whereas the carrying amount of Non Controlling Interest, also presented
within the equity section is €2,190 as computed in working 4,producing an overall
consolidated equity balance of 26,770.
36
Group liabilities are simply the sum of the relevant P and S numbers, coming in at €6,500,
which brings the balance of consolidated equity and liabilities to 33,270.
€ Notes
Goodwill 820 From working 3
Other assets 32,450 (18,000 + 14,000 + 600 – 150)
Total assets 33,270
NCI 2,190 From working 4
Total equity 26,770
Liabilities 6,500 (3,000 + 3,500)
37
Consolidation Workings (Non-Controlling Interest Examples
– Part 2)
In this example, we will apply the fair value method to compute goodwill, which will have an
impact on both the computation of goodwill as well as the balance of non-controlling
interest.
EXAMPLE:
P acquired 80% of the share capital of S for €8,000 on the 1st of January 2017, when the
statement of financial
position of S was as follows:

S (€)
Other assets 10,000
Total assets 10,000
Share capital 5,000

Total equity 8,000
Liabilities 2,000
remaining useful life of four years at that date. At the date of acquisition, the fair value of
the 20% non-controlling interest was estimated to be €2,000.
are as follows:
P (€) S (€)

38
As at the same date, consolidated goodwill is deemed to be impaired by €300.
Prepare the consolidated statement of financial position of the group as at 31st of

December 2017.
the 1st of January 2017, which we have identified as the date of consolidation:
columns:
We will need four rows:
− The third for fair value adjustments relating to S’s assets, and
− The fourth for fair value depreciation adjustments.
earnings, an additional €600 to bring S’s net assets total to their acquisition date fair value
39
Share capital € 5,000 € €

Fair value adjustments relating to S’s 600
Fair value depreciation adjustments
assets -
8,600
as at the 31st of December, that is €5,000 and €5,500 for share capital and retained earnings
acquisition.
The final row of the working, fair value depreciation adjustments, presents any additional
depreciation which will have been recorded in the group financial statements as a result of
incorporating and initially recognising the subsidiary’s net assets at their fair values, as
opposed to book values, and subsequently charging depreciation on the basis of these
amounts.
item of PPE in question was estimated as 4 years, then the additional depreciation charged
on a straight-line basis over the one year period since the date of acquisition to the date of
consolidation is calculated as 600 divided by 4 times 1, which is €150:
Share capital € 5,000 € 5,000 €

Fair value adjustments relating to S’s assets 600 600
Fair value depreciation adjustments - (150)
8,600 10,950
Additionally, we will show the additional depreciation charge of minus €150 which needs to
be recognised for the year passed since the date of acquisition. The post-acquisition column,
therefore, shows a net movement of €2,350:
40

date
€ date
€ acquisition
€
600 600 -
S’s assets
8,600 10,950 2,350
The third working, goodwill, begins with the €8,000 investment by the parent entity. Next
comes the NCI value at acquisition, which, seeing as we are supposed to follow the fair value
approach, equals the €2,000 provided in the scenario. The two numbers are then added,
giving a total of €10,000 from which we deduct the €8,600 fair value of the subsidiary’s net
assets as at the date of acquisition, which we take from the ‘acquisition date’ column of
working 2, and this yields a ‘goodwill on acquisition’ balance of €1,400.
P’s investment in subsidiary (provided): €8,000
NCI value at acquisition (provided): €2,000

€10,000
Less: fair value of subsidiary’s (provided) (€8,600)
The scenario tells us that at the date of consolidation, goodwill is in fact impaired by €300,
meaning that its carrying amount as at the 31st of December 2017 equals €1,100:

€10,000
Less: Impairment of goodwill (provided) (€300)
Goodwill on 31st Dec 2017: €1,100
41
The fourth working begins with the non-controlling interest value at acquisition, and that’s
the €2,000 already identified as part of working 3. To this we must add the NCI’s share of
the subsidiary’s post-acquisition reserves and that’s 20% of the post-acquisition column
total from working 2, so 20% of €2,350, which gives another €470. When goodwill is
computed under the fair value approach, as is the case in this example, non-controlling
interest will share in the impairment of goodwill, resulting in a deduction equal to 20% of
€300, or €60. Accordingly, the consolidation date NCI balance equals €2,410:

NCI share of post-acquisition reserves [€2,350 (W2) x 20%]: €470
NCI share of impairment [€300 (provided) x 20%]: (€60)
NCI balance: €2,410
parent’s share of the movement in the net assets of S since the acquisition, as adjusted for
the additional depreciation. This is equal to 80% of the outcome of the post-acquisition
column from working 2, which is €1,880. As noted already, we must also deduct the parent’s
share of the goodwill impairment charge, which under the fair value approach is 80%
resulting in a minus €240, which brings the group retained earnings balance to €18,640:

Less: Parent share of impairment [€300 (provided) x 80%]: -€ 240
42
overall assets of €33,550.
5 was €18,640, whereas the carrying amount of non-controlling interest, also presented
within the equity section is €2,410 as computed in working 4, producing an overall
consolidated equity balance of €27,050.
Group liabilities are the sum of the relevant P and S numbers, coming in at €6,500, which
€ Notes
Other assets 32,450 (18,000 + 14,000 + 600 – 150)
Total assets 33,550
Total equity 27,050
Liabilities 6,500 (3,000 + 3,500)
43
Deferred and Contingent Consideration – Module 3
DEFERRED CONSIDERATION:
− IFRS 3 – business combinations requires that:
The amount of the considerations transferred be measured at fair value, as at the date of
acquisition, and should, therefore, be composed of:
1. The amount payable immediately.
2. The present value of any deferred component (taking account of

the time value of money).
− The present value of the deferred component represents an obligation to make a future
payment, recorded as a liability of the group.
− Over the course of time, the present value of the obligation grows due to the unwinding
of the discount.
− The growth is recorded by crediting the deferred payment liability and debiting finance
costs within the consolidated profit and loss account.
− The increase in the carrying amount of the liability does not affect the carrying amount
of goodwill recognised upon acquisition.
CONTINGENT CONSIDERATION:
− Similar logic applies as discussed in deferred consideration.
− A contingent consideration is measured at its fair value and included in the computation
of the overall price paid for the purposes of calculating the goodwill.
− Computing the fair value of cash outflow, which is contingent upon the occurrence an
uncertain future event, requires the application of a probability weighting to reflect the
effect of uncertainty.
− Any change in subsequent periods to the accounting estimate is then accounted for in
accordance with IAS – 8.
CONSIDERATION IN FORM OF SHARES TRANSFER:
− Similar logic applies as discussed in deferred consideration.
44
− The fair value of the shares being issued provides evidence of the fair value of the
purchase price for the purposes of computing goodwill.
45
Dealing with Intra-Group Trading – Module 4
INTRA-GROUP TRADING:
If there are intra-group transactions between parent and subsidiaries:
− Adjustments are required to the amounts reported in the individual financial

statements of the parties.
− Intra-group transactions often result in the recognition of a profit or loss which is also
included in the book value of assets.
− If such assets still remain in the books of a group entity at the end of the reporting
period, the related profits will have to be eliminated from both the group results and
asset values.
− Elimination ought to be carried out in full, even if the transaction involves a subsidiary
that is less than 100% owned by the parent entity.
INTRA-GROUP TRADING TYPES:
1. Integra-group trading of inventory:
a. Transactions between parent and wholly-owned subsidiary:

Unrealised profit must be eliminated by means of the following double
entry:
46
b. Transactions between parent and partly-owned subsidiary:
i. Sale by a parent to subsidiary:
Unrealised profit must be eliminated by means of the following double entry:
ii. Sale by a subsidiary to parent:
2. Integra-group trading of non-current assets:
− The figure which needs to be eliminated may be computed by comparing:
i. The carrying amount of the asset with the intra-group transfer
ii. The carrying amount of the asset considering there was no transfer
− Treatment depends on:
i. Sale by a parent to subsidiary:
47
ii. Sale by a subsidiary to parent:
INTRA-GROUP RECEIVABLES AND PAYABLES:
− Intra-group trading generates the need to eliminate (and potentially reconcile)

receivables and payables balances.
− If these accounts do not agree at the end of the reporting period, this is due to items
which are still in transit.
− A reconciliation is performed and adjusting double entry is made in the books of the
recipient.
− Treatment depends on whether the transit balance is:
a. Cash in transit:
Following double entry is passed:
b. Goods in transit:
Following double entry is passed:
− After adjustments, the receivable and payable balance is offset against each other.
48
Consolidation Workings (Dealing with Intra-Group Trading –
Part 1)
In this module, we will consider the impact of intra-group transfers of inventory. The current
example explains the treatment of goods sold by the parent to the subsidiary, where some
of the goods remain unsold at the year end.
EXAMPLE:
(€)
Other assets 10,000
Total assets 10,000
Share capital 5,000

Total equity 8,000
Liabilities 2,000
The group uses the fair value approach to measure goodwill and that the fair value of the
20% non-controlling interest was €2,000 at the date of acquisition.
as follows:
P (€) S (€)

49
During 2017, P sold goods to S at a price of €1,800, which included a mark-up of 50%. One-
third of the goods remain in inventory as at 31st of December 2017.

December 2017.
The first working concerns group structure, and we will write that P owns 80% of S as at the
1 stof January 2017, which we have identified as the date of consolidation:
columns:
We will need just two rows:
earnings.

€ € €
Share capital 5,000
8,000
50
as at the 31st of December, that is 5,000 and 5,500 for share capital and retained earnings
respectively.
Because the intra-group transaction involved a sale from P to S, the entire unrealised profit
element is included in the books of P and no adjustments are therefore required to the
retained earnings of S.
Acquisition date Consolidation Post-acquisition

€ €
date €
8,000 10,500
The post-acquisition column will show nothing in respect of share capital and €2,500 for
retained earnings.

date
€ €
Share capital 5,000 € 5,000 -
8,000 10,500 2,500
The third working – goodwill, begins with the €8,000 investment by the parent entity. We
then include the NCI value at acquisition, which, under the fair value approach, equals the
€2,000 provided in the scenario.
The two numbers are then added, giving a total of €10,000 from which we deduct the 8,000
fair value of the subsidiary’s net assets as at the date of acquisition, which we take from the
‘acquisition date’ column of working 2, and this yields a goodwill balance of €2,000.
P’s investment in subsidiary € 8,000

NCI value at acquisition € 2,000
€
10,000
-€
Less: fair value of subsidiary’s(provided)
8,000
€
Goodwill on acquisition:
2,000
51
The fourth working begins with the non-controlling interest value at acquisition, and that’s
the €2,000 already identified as part of working 3.
another €500.
Accordingly, the consolidation date NCI balance equals €2,500.

The fifth and final working – Group retained earnings, begins with the entire retained
earnings of the parent as at the date of consolidation, giving 17,000, to which we add the
parent’s share of the movement in the net assets of S. This is equal to 80% of the outcome
of the post-acquisition column from working 2, i.e. €2,000.
As already noted, we must however adjust group retained earnings downwards for the
unrealised profit resulting from intra-group trading.
We are told that the goods were sold for a price of €1,800 which included a mark-up of 50%,
implying that the profit realised on the transaction equalled 50% of the cost of goods sold. If
you consider the Cost of goods sold to correspond to 100%, then the transfer price must
correspond to 150%, hence the profit element equals 50 of 150 or two-thirds of the price,
which gives €600. Because only one-third of the goods are still in S’s inventory, the group
retained earnings working includes a deduction for one-third of 600, or €200, which brings
the consolidation date balance to €18,800:

Less: Unrealised profit -€ 200
52
as at the 31st of December 2017.
We begin with Goodwill, which was computed as €2,000 in working 3. Next, we have other
assets, which equal the sum of the two values coming from the books of P and S, but also
reflect a deduction of €200 to eliminate the unrealised profit element included in the
carrying amount of S’s inventory, which brings the total to €31,800, resulting in overall
assets of 33,800.
5 was €18,800, whereas the carrying amount of Non Controlling Interest was €2,500 as
computed in working 4, producing an overall consolidated equity balance of 27,300.
brings the balance of consolidated equity and liabilities to 33,800.
€ Notes
Other assets 31,800 (18,000 + 14,000 -200)
Total assets 33,800
Total equity 27,300
Liabilities 6,500 (3,000 + 3,500)
53
Consolidation Workings (Dealing with Intra-Group Trading –
Part 2)
In this module, we will consider the impact of intra-group transfers of inventory. The current
example explains the treatment of goods sold by the subsidiary to the parent, where some
of the goods remain unsold at the year end.
EXAMPLE:
(€)
Other assets 10,000
Total assets 10,000
Share capital 5,000

Total equity 8,000
Liabilities 2,000
The group uses the fair value approach to measure goodwill and that the fair value of the
20% non-controlling interest was €2,000 at the date of acquisition.
as follows:
P (€) S (€)

54
During 2017, S sold goods to P at a price of €1,800, which included a mark-up of 50%. One-
third of the goods remain in inventory as at 31st of December 2017.

December 2017.
The first working concerns group structure, and we will write that P owns 80% of S as at the
1 stof January 2017, which we have identified as the date of consolidation:
columns:
We will need three rows this time:
− The third for unrealised profit
55
So, in the first column we will have 5,000 in respect of share capital and 3,000 for retained
earnings, and nothing in respect of unrealised profit.

€ €
date €
Share capital 5,000
Unrealised profit -
8,000
as at the 31st of December, that is 5,000 and 5,500 for share capital and retained earnings
respectively.
Because the intra-group transaction involved a sale from S to P, the entire unrealised profit
element, which we already computed to be €200 in the previous video, must be eliminated
from the books of S, necessitating a negative adjustment.

€ €
date €
Unrealised profit - (200)
8,000 10,300
Accordingly, the post-acquisition column shows nothing in respect of share capital, a

positive €2,500 for retained earnings, and a negative €200 unrealised profit adjustment,
which yields a total of €2,300.

date
€ €
Unrealised profit - (200) (200)
8,000 10,300 2,300
56
The third working – goodwill, begins with the €8,000 investment by the parent entity. We
then include the NCI value at acquisition, which, under the fair value approach, equals the
€2,000 provided in the scenario.
The two numbers are then added, giving a total of €10,000 from which we deduct the 8,000
fair value of the subsidiary’s net assets as at the date of acquisition, which we take from the
‘acquisition date’ column of working
2, and this yields a goodwill balance of €2,000.
P’s investment in subsidiary €8,000
NCI value at acquisition €2,000

€10,000
The fourth working begins with the Non Controlling Interest value at acquisition, and that’s
the €2,000 already identified as part of working 3.
another €460.
Accordingly, the consolidation date NCI balance equals €2,460.

57
The fifth and final working – Group retained earnings, begins with the entire retained
of the post-acquisition column from working 2, i.e., €1,840. This brings the total of retained
earnings to €1,840

as at the 31st of December 2017.
We begin with Goodwill, which was computed as €2,000 in working 3. Next, we have other
assets, which equal the sum of the two values coming from the books of P and S, but also
reflect a deduction of €200 to eliminate the unrealised profit element included in the
carrying amount of P’s inventory, which brings the total to €31,800, resulting in overall
assets of 33,800.
5 was €18,840,whereas the carrying amount of Non Controlling Interest was €2,460 as
computed in working 4, producing an overall consolidated equity balance of 27,300.
58
brings the balance of consolidated equity and liabilities to 33,800.
€ Notes
Other assets 31,800 (18,000 + 14,000 -200)
Total assets 33,800
Total equity 27,300
Liabilities 6,500 (3,000 + 3,500)
59
Consolidation Workings (Dealing with Intra-Group Trading
In this example, we will tackle a scenario in which the parent makes a transfer of a non-
current asset to the subsidiary, at a price that generates a gain on disposal.
EXAMPLE:
P acquired 80% of the share capital of S for €8,000 on the 1st of January 2017, when the
S (€)
Other assets 10,000
Total assets 10,000
Share capital 5,000

Total equity 8,000
Liabilities 2,000
The group uses the fair value method to measure goodwill. At the date of acquisition, the
fair value of the 20% non-controlling interest was estimated to be €2,000.
are as follows:
P (€) S (€)

60
Immediately after the acquisition, P sold to S an item of property, plant and equipment at a
price of €1,000. At the time of disposal, the item had a net carrying amount of €700 and a
remaining useful life of five years. The assessment of the asset’s useful economic life did not
change as a result of the transfer.
Prepare the consolidated statement of financial position of the group as at 31 st of

December 2018.
As always, the first working concerns group structure, and we write that P owns 80% of S:
The second working is subsidiary net assets where we find the standard three columns and
just two rows, as the unrealised profit element, which we will calculate in a moment, will
need to be eliminated from the retained earnings of the seller, and that’s P:
So, in the first column we will have €5,000 in respect of share capital and €3,000 for
retained earnings:

€ €
date €
Share capital 5,000
8,000
as at the 31st of December, that is €5,000 and €5,500 for share capital and retained earnings
respectively:

€ €
date €
8,000 10,500
61
Accordingly, the post-acquisition column shows nothing in respect of share capital and a
positive €2,500 for retained earnings:

date
€ €
8,000 10,500 2,500
The third working, goodwill, begins with the €8,000 investment by the parent entity. Next
comes the NCI value at acquisition, which, under the fair value approach, equals the €2,000
provided in the scenario. The two numbers are then added, giving a total of €10,000 from
which we deduct the €8,000 fair value of the subsidiary’s net assets as at the date of
acquisition, which we take from the ‘acquisition date’ column of working 2, and this
yields a goodwill balance of €2,000:

€10,000
The fourth working begins with the non-controlling Interest value at acquisition, and that’s
the €2,000 already identified as part of working 3. To this we must add the NCI’s share of
the subsidiary’s post-acquisition reserves and that’s 20% of the post-acquisition column
total from working 2, so 20% of €2,500, which gives another €500. Accordingly, the
consolidation date NCI balance equals €2,500:

62
of the post-acquisition column from working 2, which is €2,000. As already noted, we must,
however, adjust group retained earnings downward for the unrealised profit resulting from
the intra-group PPE transfer.
Treatment of unrealised profit:
The size of the adjustment is calculated by comparing the carrying amount of the asset now
with the hypothetical carrying amount that would have existed had the sale never occurred.
So, at the time of transfer the asset was carried by P at an amount equal to €700 and given a
five year remaining useful life, two years later, it would have been held at three-fifths of the
original amount, that is €420. Two years on from the transfer, S carries the asset at three-
fifths of €1,000, which is €600, which necessitates a downward adjustment of €180 to group
retained earnings and non-current assets. Please note that if the sale were made by the
subsidiary instead of the parent, the adjustment would be presented in working 2 Subsidiary
net assets, affecting the post-acquisition reserves of S.
Overall the group retained earnings balance comes in at €18,820:

Less: Unrealised profit [Refer to working below]: -€ 180
Working for unrealised profit:
Carrying value of the asset if the sale had not been made:
€700 x 3/5 = €420
Carrying value of the asset after the sale has been made: €1,000 x 3/5 = €600
Difference = €600 – €420 = €180 (this has to be deducted from the group retained earnings
to remove this effect).
63
the books of P and S, but also reflect a deduction of €180 to eliminate the unrealised profit
element included in the carrying amount of S’s property, plant and equipment, which brings
the total to €31,820, resulting in overall assets of €33,820.
5 was €18,820, whereas the carrying amount of non-controlling interest was €2,500 as
computed in working 4, producing an overall consolidated equity balance of €27,320.
€ Notes
Other assets 31,820 (18,000 + 14,000 – 180)
Total assets 33,820
Total equity 27,320
Liabilities 6,500 (3,000 + 3,500)
64
Consolidation Workings (Dealing with Intra-Group Trading
In this example, we will explore the recommended approach to reconciling receivables and
payables balances of individual group members as well as dealing with cash and inventory in
transit.
EXAMPLE:
The following balances have been extracted from the individual statement of financial
position of P and S, a fully-owned subsidiary of P, as at the 31st of December 2017:
P (€) S (€)
Inventory 40,000 17,000
Trade receivables from S 40,000 -
Cash 5,000 10,000
Trade payables to P - 22,000
There was cash in transit of €3,000 from S to P at the 31 st of December 2017, and that goods
dispatched by P to S before the year-end, with the related invoices totalling €15,000 had not
been received by S at the year-end. The original cost of the goods was €15,000.
Reconcile the relevant intra-group positions and provide the balances to be included in
the consolidated statement of financial position as at the 31st of December 2017.
Solution:
Let us start by attempting to deal with the first transaction, namely the cash which is still in
transit, by attempting to follow it through to its final destination, the books of P. If the cash
were received, then P’s cash position, which currently equals €5,000, would increase by
€3,000 to reach €8,000.
At the same time, the trade receivables from S balance shown by P would drop by the same
€3,000 to an adjusted level of €37,000.
In books of P:
Cash: 5,000 + 3,000 = €8,000.
Trade receivables from S: 40,000 – 3,000 = €37,000.
Following the second transaction through to its ultimate destination, the books of S, means
recording an inflow of inventory with a carrying amount of €15,000, which raises S’s
inventory balance to €32,000. At the same time, receipt of the associated invoice would
65
cause a €15,000 jump in reported trade payables to P, from the current level of €22,000 to
an adjusted €37,000.
In books of S:
Inventory: 17,000 + 15,000 = €32,000.
Trade receivables from S: 22,000 + 15,000 = €37,000.
You should appreciate that the receivables from S and payables to P lines coming from the
books of P and S respectively, have now effectively been reconciled and we can therefore
eliminate them when preparing the consolidated statement of financial position.
The balance of consolidated inventory would equal €40,000 plus an adjusted €32,000, which
is €72,000. Group cash comprises the adjusted €8,000 and €10,000 to give €18,000 overall:
P (€) S (€) Consolidated balances

Inventory 40,000 32,000 72,000
Trade receivables from S 37,000 - -
Cash 8,000 10,000 18,000
Trade payables to P - 37,000 -
66
Comprehensive Income Consolidation (Part 1) – Module 5
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME:
Show the gains or losses generated by the group over an accounting period, as if that group
were a single economic entity.
The method of producing a consolidated income statement involves taking the following
steps:
− Adding all items of income and expenses of the subsidiary to those of the parent entity,
− Eliminating the effects of intra-group trading (adjusting consolidated revenue and cost
of sales),
− Adjusting consolidated finance income and expenses (intra-group loans),
− Eliminating the P&L impact of dividends received by the parent from its involvement
with subsidiaries,
− Apportioning the consolidated profit or loss for the year between shareholders of the
parent entity and non-controlling interest.
INTRA-GROUP SALES:
1. When parent sells goods to subsidiary:
a. Profit is realised
− This happens when all goods are sold by the subsidiary to 3rd parties.
− There is no adjustment needed.
b. Profit remains unrealised
− This happens when the goods sold to the subsidiary are still appearing in the inventory
and not sold to 3rd parties.
− The unrealised profit appearing in the individual income statement of parent will be
adjusted in the profit after tax of parent.
− This adjustment will decrease the total profit after tax, and therefore, total profit
available to shareholders of the parent.
67
2. When subsidiary sells goods to parent:
a. Profit is realised
− This happens when all goods are sold by the parent to 3rd parties.
− There is no adjustment in the profit after tax of the subsidiary when apportioning
group’s profit after tax among shareholders of the parent and non-controlling interest.
b. Profit remains unrealised
− This happens when the goods sold to the parent are still in appearing in the inventory
and not sold to 3rd parties.
− The unrealised profit appearing in the individual income statement of the subsidiary will
be adjusted in its profit after tax.
− This adjustment will decrease the total profit after tax of the subsidiary that will be
apportioned between shareholders of parent and non-controlling interest.
68
Comprehensive Income Consolidation (Part 2) – Module 6
OTHER ADJUSTMENTS IN CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME:
1. Group enterprises carry out transfers of non-current assets at prices which deviated
from their existing book values:
− Accounting issues generated:
a. Seller’s income statement includes a profit, which needs to be

eliminated from the consolidated financial statements of the group.
b. Asset is carried in the books of the purchaser at an inflated price,

relative to the value previously reported in the statement of financial
position of the parent
− Adjustments:
a. Immediate:
− Debit to the seller’s reported profit
− Credit to consolidated non-current assets
b. Subsequent:
Adjustments required become progressively smaller as the gain generated upon the sale by
the parent is gradually realised by the higher depreciation charges booked by the subsidiary.
2. Impairment of goodwill:
Any associated loss must be booked directly to the consolidated income statement,
treatment depends
on the recognition method:
a. If goodwill is measured under the proportion of net assets method:
Impairment loss attributed fully to equity holders of the parent entity – charged to group
retained earnings.
b. If goodwill is initially computed under the fair value method:
The impact of any impairment loss split between consolidated retained earnings and non-
controlling interest.
69
3. Depreciation of those of the subsidiary’s assets, which upon their initial recognition in
the consolidated statement of financial position, are revalued to reflect fair value:
An adjustment to the depreciation charge as reported in the consolidated income statement

will therefore typically be required.
4. Revaluation gains or losses on items of property, plant and equipment, if group

follows the
revaluation model, but the individual subsidiaries utilise the cost approach instead:
Adjustments made at the consolidated statement of other comprehensive income.
70
Subsidiary Disposals
DISPOSAL WITH RETAINING EQUITY INVOLVEMENT:
Let’s examine situations where the parent disposes of all of the subsidiary’s shares which it
previously held as opposed to situations where control is lost, nevertheless some equity
involvement is still retained.
Accounting entries that will appear in the individual financial statements of the parent entity
are:
Dr Cash proceeds
Cr Investment in subsidiary
Dr/Cr Gain or loss (P&L)
From a consolidated perspective, a subsidiary disposal triggers the following two operations:
1) Consolidation of the subsidiary’s results all the way up to the date of disposal,
and subsequent booking of a gain or loss on disposal in the consolidated income
statement;
2) Removal of the subsidiary’s assets and liabilities from the consolidated

statement of financial position, together with any accompanying goodwill and
non-controlling interest.
The gain or loss on disposal which is booked in the consolidated income statement is
computed differently to the analogous gain or loss as recognised in the individual accounts
of the parent:
Consolidated gain or loss = Sales proceeds - Goodwill less any subsequent impairments -
- Net assets + Non-controlling interest
Note: This gain or loss is recognised in the consolidated income statement.
DISPOSAL OF SUBSIDIARIES AS DISCONTINUED OPERATIONS:
An entity that is committed to selling its subsidiary, such that it results in loss of control shall
also classify all the assets and liabilities of that subsidiary as held for sale when the criteria
set out in in the standard (IFRS 5) are met.
Moreover, it is important to note that a subsidiary that has been acquired exclusively with a
view to resale will be treated as a discontinued operation as well.
71
IAS 28 (Module 1) - Definitions and Equity Method Basics
DEFINITIONS
An associate is an entity over which the investor has significant influence and which is
neither a subsidiary nor a joint venture of the investor.
Significant influence is defined as the power to participate in the financial and operating
policy decisions of the investee without having control or joint control over those policies.
The assessment of significant influence is a matter of judgement. If an investor holds at least

20 percent or more, but less than 50 percent of the voting power of an investee, the
investor is presumed to have significant influence.
According to IAS 28, the following situations also create significant influence:
− Where the investor has a representative on the board of directors or on an equivalent

body;
− Where the investor actively participates in the policy-making processes of the entity,
including the level of dividends to be paid;
− Where a number of significant transactions take place between the investor and the
investee;
− Where members of management move between the two entities; or
− Where the investor provides essential technical information to the entity.
TREATMENT OF ASSOCIATE IN THE CONSOLIDATED FINANCIAL STATEMENT
According to IAS 28, associated companies will be shown in consolidated accounts under the
equity method, unless the investment meets the criteria of a disposal group held for sale
under IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations. The use of the
equity method should be discontinued from the date that the investor ceases to have
significant influence. The equity method is a method of accounting whereby:
− The investment is reported in the consolidated statement of financial position in the

non-current asset section. The investment in an associate is initially recognised at cost
and the carrying amount is increased or decreased to recognise the investor’s share of
the profit or loss of the investee after the date of acquisition.
72
− The investor's share of the investee's profit or loss is recognised in the investor's profit
or loss. Distributions received from an investee reduce the carrying amount of the
investment.
The equity method will only apply if it is the investor preparing the consolidated financial
statements.
73
Investment in Associate IAS 28
An associate is an entity over which the investor has significant influence and which is
neither a subsidiary nor a joint venture of the investor.
Significant influence is defined as the power to participate in the financial and operating policy
decisions of the investee without having control or joint control over those policies.
Treatment Of Associate in the Consolidated Financial Statement:
According to IAS 28, Associated companies will be shown in consolidated accounts under the
equity method, unless the investment meets the criteria of a disposal group held for sale under
IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations. The use of the equity
method should be discontinued from the date that the investor ceases to have significant
influence
The equity method is a method of accounting whereby:
− The investment is reported in the consolidated statement of financial position in the non-
current asset section. the investment in an associate is initially recognised at cost and the
carrying amount is increased or decreased to recognise the investor’s share of the profit or
loss of the investee after the date of acquisition.
− In the consolidated statement of comprehensive income, income from associates is

reported after profit
from operations together with finance costs and finance expenses.The income reflects the
investor’s share of the post-tax results of operations of the investee
Dividend received from Associate is not shown because the share of Associate’s profits (before
dividend) has been included in the group account. To include the dividend as well would be
double counting.
Associate Losses:
If the associate has reported a net loss for the period, the entity will recognise its share of loss
in
associate only up to extent of its interest in the associate, any excess loss will not be
recognised.
74
Any impairment loss should be recognised in accordance with IAS 36 Impairment of Assets for
each associate individually.
75
IAS 28 Investments in Associates and Joint Ventures -
Module 3
TRADING WITH ASSOCIATES:
The associate is not controlled by the parent entity in the group, nor by any of the other
group members, and is, therefore, considered to be outside of the group. As result, the
effects of transactions between the associate and group members are not eliminated from
the consolidated income statement.
IAS 28 requires gains and losses resulting from what it refers to as upstream and
downstream transactions between group members and the associate to be recognised in
the consolidated financial statements only to the extent of unrelated investors’ interest in
the associate. Upstream transactions are sales from the associate to group members.
Downstream transactions involve sales from the group to the associate.
Therefore, the investor’s share in the associate’s gains or losses resulting from such
transactions needs to be eliminated.
From prior modules you should remember the way in which the investment in the associate
is computed:
Investment in associate = Cost of investment + Investor’s share of post acquisition

gains/losses - Dividends received - Impairment - Parent’s share of unrealised profit in
inventory
Note: The final adjustment related to parent’s share of unrealised profit in inventory is only
relevant if the transaction giving rise to the profit was a downstream sale and the necessary
adjustment involves a credit to the Investment in associate account within the consolidated
statement of financial position. If, conversely, the sale was an upstream one, then the
adjustment calls for a credit to consolidated inventory with no impact on the carrying
amount of the associate.
76
EXAMPLE:
P is the parent entity in a group and sells inventory costing €500 to A, an associate in which
it has a 40% equity stake, for €750. At the reporting date, A still holds the inventory on its
books.
Because the entire inventory that was sold by P is still held by A as at the end of the
reporting period, only 60%
of the profit is regarded as having been realised from a group perspective.
Total profit generated by P = Selling price - Cost of sales = €750 - €500 = €250
Of this amount of profit, 40%, or €100, needs to be eliminated with the following
adjustment:
Dr Share in associate’s profit (P&L) Cr Investment in Associate (SOFP)
Note: Making the debit to the share of the associate’s profit within consolidated P&L is the
recommended approach despite the fact that it was P who sold the goods to A, and it is,
therefore, P who booked the profit on the sale.
If we turn the situation around and now imagine that the same goods were sold by A to P,
and that they now remain within P’s inventory as at the end of the reporting period, then
once again the unrealised profit of €100 will need to be eliminated by booking a debit to the
share of the associate’s profit in the consolidated income statement.
Note: This time, however, the corresponding credit will be taken to consolidated inventory,
as it is there that the unrealised profit also resides.
77
IFRS 11 and IAS 27
IFRS 11 Definitions
Joint arrangement 'an arrangement of which two or more parties have joint control'.
Joint control 'the contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require the unanimous consent of the parties
sharing control'.
There are two types of arrangement in which there is joint control as set out by the standard:
1. Joint venture
Joint arrangement whereby the parties that have joint control of the arrangement have rights
to the net assets of the arrangement.
Joint ventures are accounted for using the equity method of accounting in accordance with IAS
28 Investments in Associates and Joint Ventures. Therefore, a joint venture is accounted for in
the same way as an associate.
2. Joint operation
Joint arrangement whereby the parties that have joint control of the arrangement have rights
to the assets, and obligations for the liabilities, relating to the arrangement.
A joint operation will exist where the arrangement is not structured through a separate vehicle.
A joint operator would account for its share of the assets, liabilities, revenues and expenses
relating to its involvement with the joint operation in accordance with the relevant IFRSs.
Under IFRS 11, a joint arrangement will either be a joint venture or a joint operation.
78
IFRS 27
IAS 27 Separate financial statements outlines how parent companies should account for their
investments in subsidiaries, associates and joint ventures within the individual financial
statements of the parent.
When an entity prepares separate financial statements, investments in subsidiaries, associates,

and jointly controlled entities are accounted for either:
− at cost, or
− in accordance with IFRS 9 Financial Instruments, or
− using the equity method as described in IAS 28 Investments in Associates.
79

FR - Consolidation Workings

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FR - Consolidation Workings

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FR – Consolidation workings

Goodwill is computed following below steps:

− A cost of control account is opened.

− Investment in a subsidiary is debited into the control account.

− Share capital of subsidiary is credited into the control account.

− A typical cost of control is shown below:

− The cost of control account in such circumstances will look like:

− Goodwill is recognised under non-current assets within the consolidated statement of

− Goodwill is not subject to amortization instead, it must be tested for impairment on an

− If the acquisition date before the reporting date, post-acquisition earnings of a

Retained earnings 12,000 3,000

Prepare the consolidated statement of financial position of the group as at 1 st of January

WORKING 2 – SUBSIDIARY’S NET ASSETS:

Acquisition date Consolidation date Post-acquisition

Acquisition date Consolidation date Post-acquisition

Share capital € 5,000 5,000 -

Acquisition date Consolidation date Post-acquisition

Share capital € 5,000 € 5,000 € -

Investment in subsidiary: €8,000

Less: fair value of subsidiary’s net assets at acquisition: (€8,000)

WORKING 4 – NON-CONTROLLING INTEREST (NCI):

WORKING 5 – GROUP RETAINED EARNINGS:

Parent retained earnings: €12,000

Parent’s share of subsidiary’s post acquisition retained earnings: Nil

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1ST OF JANUARY 2017:

Other assets 10,000

Retained earnings 3,000

Retained earnings 17,000 5,500

Total equity and liabilities 28,000 14,000

WORKING 1 – GROUP STRUCTURE:

WORKING 2 – SUBSIDIARY’S NET ASSETS:

Acquisition date Consolidation date Post-acquisition

Acquisition date Consolidation date Post-acquisition

Acquisition date Consolidation date Post-acquisition

Share capital € 5,000 € 5,000 € -

Investment in subsidiary: €8,000

Less: fair value of subsidiary’s net assets at acquisition: (€8,000)

WORKING 4 – NON-CONTROLLING INTEREST (NCI):

WORKING 5 – GROUP RETAINED EARNINGS:

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31ST OF DECEMBER 2017:

Retained earnings 12,000 3,000

WORKING 1 – GROUP STRUCTURE:

− Consolidation date, and

− The first for share capital,

− The second for retained earnings, and

Acquisition date Consolidation date Post-acquisition

Acquisition date Consolidation date Post-acquisition

WORKING 4 – NON-CONTROLLING INTEREST (NCI):

WORKING 5 – GROUP RETAINED EARNINGS:

Parent retained earnings: €12,000

Parent’s share of subsidiary’s post acquisition retained earnings: Nil

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 1ST OF JANUARY 2017:

Retained earnings 17,000 5,500

WORKING 1 – GROUP STRUCTURE:

WORKING 2 – SUBSIDIARY’S NET ASSETS:

− Consolidation date, and

This time around, we will actually need four rows:

− Fair value adjustments relating to S’s assets

− Fair value depreciation adjustments.

Acquisition date Consolidation date Post-acquisition

Acquisition Consolidation Post-

Investment in subsidiary: € 10,000

WORKING 4 – NON-CONTROLLING INTEREST (NCI):