CONSOLIDATION

Group
• Many large businesses consist of several companies controlled by one
central or administrative company. Together these companies are called a
group.

• The controlling company, called the parent or holding company, will own
some or all of the shares in the other companies, called subsidiaries
 Group
Reasons to operate as a group
• To control size of each company
• For the goodwill associated with the names of the subsidiaries
• For tax or legal purposes
 Key Terms
• Control: An investor controls an investee when the investor is exposed, or has
rights, to variable returns from its involvement with the investee and has the
ability to affect those returns through power over the investee.
• Power: Existing rights that give the current ability to direct the relevant activities
of the investee
• Subsidiary: An entity that is controlled by another entity.
• Parent: An entity that controls one or more subsidiaries.
• Group. A parent and all its subsidiaries.
• Associate. An entity over which an investor has significant influence and which is
neither a subsidiary nor an interest in a joint venture.
• Significant influence. The power to participate in the financial and operating policy
decisions of an investee but it is not control or joint control over those policies.
 Required accounting

Investment Criteria Treatment in group accounts

Subsidiary Control Full consolidation

Associate Significant influence Equity accounting

Investment Asset held for As for single company accounts

accretion of wealth
 Investment in Subsidiary
Key is control.
• In most cases, this will involve the holding company or parent owning a majority (>50%) of the ordinary
shares (voting rights) in the subsidiary.
• There are circumstances, however, when the parent may own only a minority of the voting power in the
subsidiary, but the parent still has control.

Definition of control and identifies three separate elements of control:

An investor controls an investee if and only if it has all of the following.
(a) Power over the investee
(b) Exposure to, or rights to, variable returns (dividends, renumeration, fees and loss from credit support)
from its involvement with the investee
(c) The abilty to use its power over the investee to affect the amount of the investor's returns

If there are changes to one or more of these three elements of control, then an investor should reassess
whether it controls an investee
 Investment in Associate
Key criterion here is significant influence; 'power to participate', but not to 'control’
• Holding 20% or more of voting rights (it can be presumed that the investor has significant
influence over the investee, unless it can be clearly shown that this is not the case)
• Significant influence can be presumed not to exist if the investor holds less than 20% of the
voting power of the investee, unless it can be demonstrated otherwise

The existence of significant influence is evidenced in one or more of the following ways.
(a) Representation on the board of directors (or equivalent) of the investee
(b) Participation in the policy making process
(c) Material transactions between investor and investee
EQUITY METHOD
(d) Interchange of management personnel
(e) Provision of essential technical information
 Consolidated Financial Statements
The financial statements of a group in which the assets, liabilities, equity,
income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity

All Subsidiaries foreign and domestic have to be consolidated

 Consolidated Financial Statements
Power is defined as existing rights that give the current ability to direct the
relevant activities of the investee. There is no requirement for that power to
have been exercised Ability rather than the contractual right

Relevant activities may include: Examples of rights:

• Selling and purchasing goods
or services
• Managing financial assets
• Selecting, acquiring and
disposing of assets
• Researching and developing
new products and processes
• Determining a funding
structure or obtaining
funding
• Voting rights and existence and effect of potential
voting rights
• Rights to appoint, reassign or remove key management
personnel who can direct the relevant activities
• Rights to appoint or remove another entity that directs
the relevant activities
• Rights to direct the investee to enter into, or veto
changes to, transactions for the benefit of the investor
• Other rights, such as decision-making rights, such as
those specified in a management contract
Exemption from preparing group accounts

• The parent is itself a wholly-owned subsidiary or it is a partially owned

subsidiary of another entity and its other owners, including those not
otherwise entitled to vote, have been informed about, and do not object
to, the parent not presenting consolidated financial statements.
• Its securities are not publicly traded.
• It is not in the process of issuing securities in public securities markets.
• The ultimate or intermediate parent publishes consolidated financial
statements that comply with International Financial Reporting Standards.

Risk? Off balance sheet

 Consolidated Financial Statements
Different reporting dates
• The subsidiary may prepare additional statements to the reporting
date of the rest of the group, for consolidation purposes.
• If this is not possible, the subsidiary's accounts may still be used for
the consolidation, provided that the gap between the reporting dates
is three months or less.
• Where a subsidiary's accounts are drawn up to a different accounting
date, adjustments should be made for the effects of significant
transactions or other events that occur between that date and the
parent's reporting date
 Consolidated Financial Statements
Uniform accounting policies
• Consolidated financial statements should be prepared using uniform
accounting policies for like transactions and other events in similar
circumstances.
• Adjustments must be made where members of a group use different
accounting policies, so that their financial statements are suitable for
consolidation.
 Consolidated Financial Statements
• Add together the assets and liabilities of the parent company and each
subsidiary.
• The whole of the assets and liabilities of each company are included, even
though some subsidiaries may be only partly owned.
• The 'equity and liabilities' section of the statement of financial position will
indicate how much of the net assets are attributable to the group and how
much to outside investors in partly owned subsidiaries.
• Outside investors are known as the non-controlling interest.
 Consolidation -
Example 1
• 100% ownership
• Add Parent (P) and Subsidiary (S) Balance sheet
• Eliminate INVESTMENT ACCOUNT IN P
The carrying amount of the parent's investment in each subsidiary and the parent's
portion of equity of each subsidiary are eliminated or cancelled
P acquires 100% of the equity shares of S when S is set up. Net assets of S were
$200,000 at the time and P paid the same amount to buy the shares.
(Consolidated statement of financial position after acquisition)
Parent P Subsidiary S Consolidated
Non-Current Assets:
Property, plant & equipment 750,000 190,000 940,000
Investment in S 200,000 -
950,000 190,000
Current Assets 175,000 55,000 230,000
1,125,000 245,000 1,170,000
Equity:
Equity shares of $1 each 300,000 150,000 300,000

Share Premium 350,000 50,000 350,000

Retained Earnings 325,000 - 325,000

975,000 200,000 975,000

Current Liabilities 150,000 45,000 195,000

1,125,000 245,000 1,170,000

 Consolidation -
Example 2
• 100% ownership
• P acquires S on 1/1 consolidated statements are prepared 31/12

Steps
• Add Parent (P) and Subsidiary (S) Balance sheet
• Eliminate Investment in S
Pre and post acquisition earnings: P acquires 100% of the equity shares of S on 1/1. Net
assets of S were $230,000 at the time and P paid the same amount to buy the shares. Prepare the
consolidated SOFP at 31/12.
P S P S
1/1 1/1 31/12 31/12
Non-current Assets:
PP&E 700,000 200,000 710,000 285,000 995,000
Investment in S 230,000 - 230,000 -
930,000 200,000 940,000 285,000
Current Assets 120,000 100,000 170,000 80,000 250,000
1,050,000 300,000 1,110,000 365,000 1,245,000
Equity:
Equity shares of $1 each 200,000 40,000 200,000 40,000 200,000
Share Premium 300,000 100,000 300,000 100,000 300,000
Retained Earnings 370,000 90,000 400,000 160,000 470,000 (*)
870,000 230,000 900,000 300,000 970,000
Current Liabilities 180,000 70,000 210,000 65,000 275,000
1,050,000 300,000 1,110,000 365,000 1,245,000

(* P’s R.E 400 + S’s post acq R.E (160-90))

 Consolidation
Example 3
• 100% ownership
• Intra group balances

Steps
• Add Parent (P) and Subsidiary (S) Balance sheet
• Eliminate Investment in S
• Eliminate intra group balances
For e.g Trade receivables and payables cancel each other
Intra Group trading:P regularly sells goods to its one subsidiary company, S , which it has owned since S's
incorporation. Prepare SoFP at 31/12.
P S
31/12 31/12
Non-current Assets:
PP&E 35,000 45,000 80,000
Investment in S 40,000 -
75,000
Current Assets
Inventory 16,000 12,000 28,000
Trade Receivable S 2,000
Other 6,000 9,000 15,000
Cash & Cash Equi 1,000 1,000
100,000 66,000 124,000
Equity:
Equity shares of $1 each 70,000 40,000 70,000
Retained Earnings 16,000 19,000 35,000 R.E of S at
inception are 0
86,000 59,000 105,000
Current Liabilities
Bank Overdraft 3,000 3,000
Trade & Other pay 14,000 To P 2,000 16,000
Other 2,000
100,000 66,000 124,000
 Consolidation
Example 4
• 100% ownership
• The inter-company trading balances may be out of step because of goods or cash in transit.
• One company may have issued loan stock of which a proportion only is taken up by the other
company

Steps
• Add Parent (P) and Subsidiary (S) Balance sheet
• Eliminate Investment in S
• Procedure is to cancel inter company balances as far as possible.
• The remaining uncancelled amounts will appear in the consolidated statement of financial
position.
• Uncancelled loan stock will appear as a liability of the group.
• Uncancelled balances on intra-group accounts represent goods or cash in transit, which will
appear in the consolidated statement of financial position
 P S
31/12 31/12
Non-current Assets:
PP&E 120,000 100,000 220,000
Investment in S 80,000 -
80,000 ordinary shares of $1 each 20,000
$20,000 of 12% loan stock in S
220,000
Current Assets
Inventory 50,000 60,000 110,000
Trade Receivable 40,000 30,000 70,000
Current account with S/(Cons statement Good in transit) 18,000 6,000
Cash 4,000 6,000 10,000
332,000 196,000 416,000
Equity:
Equity shares of $1 each 100,000 80,000 100,000
Retained Earnings 95,000 28,000 123,000
195,000 108,000 223,000
Non Current Liabilities
10% loan stock 75,000 75,000
12% loan stock 50,000 30,000 (50,000x60%)
Current Liabilities
Trade and other payable 47,000 16,000 63,000
Taxation 15,000 10,000 25,000
Current account with P 12,000
332,000 196,000 416,000
 Consolidation
Example 5
• 100% ownership
• Goodwill arising on acquisition
The amount which P Co records in its books as the cost of its investment in S Co may be more or less
than the carrying amount of the net assets it acquire

Steps
• Add Parent (P) and Subsidiary (S) Balance sheet
• Eliminate Investment in S
• Calculate Goodwill
Consideration transferred X
Net assets acquired as represented by:
Ordinary share capital X
Share premium X
Retained earnings on acquisition X (X)
Goodwill X
ACQUITSITION AT P S CSFP
31/12
31/12 31/12 31/12
Non-current Assets:
Non-current Goodwill 20,000
Assets: Current Assets 100,000

Investment in 50,000 80,000 - 120,000

shares of S at cost
Current Assets 40,000 60,000 Equity:
Ordinary shares of $1 each 75,000
120,000
Retained Earnings 45,000
Equity:
120,000
Ordinary shares 75,000 50,000
Retained Earnings 45,000 10,000
120,000 60,000
Consideration transferred 80,000
Net assets acquired as represented by:
Ordinary share capital 50,000
Retained earnings on acquisition 10,000
(60,000)
Goodwill 20,000
Goodwill: P paid $250,000 to buy the shares. At acquisition, the fair value of the net assets of S was
$175,000. Expenses relating to the acquisition were $50,000 but have not been recorded yet. Prepare the
CSFP at 31/12
P S CSFP
31/12 31/12 31/12
Non-current Assets: Non-current Assets:
Investment in S 250,000 Goodwill (250 - 175) 75,000
Other Assets 550,000 275,000 Other Assets (550 + 275 - 50) 775,000
800,000 275,000 850,000

Equity:
Equity shares of $1 each 250,000 100,000 Equity:

Share Premium 100,000 50,000 Equity shares of $1 each 250,000

Retained Earnings at 1 320,000 25,000 Share Premium 100,000
January, 2013 Retained Earnings (320 + 80 - 50) + 45 395,000
Retained profit for the year to 80,000 45,000
P’s + S’s post-acquisition 745,000
31 December, 2013
750,000 220,000 Current Liabilities (50 + 55) 105,000
Current Liabilities 50,000 55,000 850,000
800,000 275,000