Consolidated financial

statements
Part 2
MECHANICS OF CONSOLIDATION
1. ESTABLISH GROUP STRUCTURE
2. NET ASSETS OF SUBSIDIARY
3. GOODWILL
4. NON-CONTROLLING INTEREST
5. GROUP RETAINED EARNINGS
FAIR VALUE OF CONSIDERATION AND
NET ASSETS
FAIR VALUE
 The amount for which an asset could be
exchanged or a liability settled between
knowledgeable, willing parties in an arm’s
length transaction.
 To accurately account for GOODWILL:
◦ Consideration paid (investment) for subsidiary = fair value
◦ Subsidiary’s identifiable assets and liabilities = accounted
for at fair value
FAIR VALUE OF CONSIDERATION AND
NET ASSETS (cont.)
FAIR VALUE OF NET ASSETS:
 IFRS 3 revised requires that the subsidiary’s assets and
liabilities are recorded at their fair value for the purposes of
the calculation of goodwill and production of consolidated
accounts.
 Adjustments will therefore be required where the subsidiary’s
accounts themselves do not reflect fair value.
 Adjust both columns of W2 to bring the net assets to fair
value at acquisition and reporting date.
UNREALISED PROFIT
 Profits made by members of the group on transactions with
other companies within the group
 Recognised in the accounts of the individual companies
 Group = eliminate unrealised profits

Example:
 Inventory sold between companies within the same group

 Cancel out current accounts

 Where goods are still held by the company that bought the

goods = unrealised profit has to be eliminated upon

consolidation
 Until goods are sold to a 3rd party, no unrealised profit should

exist in the group accounts

UNREALISED PROFIT (cont.)
1. Determine the value of closing inventory
included in individual company’s accounts
purchased by other company in group.

2. Use mark-up or margin to calculate how

much of the value represents profit earned
by the selling company

3. Make adjustments
UNREALISED PROFIT (cont.)
Adjustments:
 Seller = parent:
Dr. Group retained earnings
Cr. Group Inventory
 Seller = subsidiary:
Dr. Subsidiary retained earnings (at reporting date)
Cr. Group Inventory
CURRENT ACCOUNTS AND
CASH/GOOD IN TRANSIT
Receivable in P and payable in S:
 Amounts owing within the group
 Should be eliminated upon consolidation

Cash/goods in transit
 At year-end current accounts may not agree because of in-
transit items (goods or cash)
 Make adjusting entry to the statement of financial position of
the recipient
 Cash: Dr Cash in transit; Cr Receivables current account
 Goods: Dr Inventory; Cr Payables current account
 Reconciled current account balances are removed from both
receivables and payables in the consolidated SOFP
Bank accounts
Upon consolidation the bank overdraft of one
company in the group can only be set off against
the favourable bank balance of another company
in the group is the following conditions have
been met:
◦ Both companies have their accounts at the same bank;
◦ The company with the favourable bank balance has
guaranteed the overdraft facility of the other
company; or
◦ The bank itself would set off the accounts against
each other in terms of an agreement between the 2
companies and the bank