1 Groups and consolidation: an overview

 EXAM FOCUS POINT 
If you're confused by this, think of it another way, from the point of view of group reserves. Only the 
profits earned 
by the group
should be consolidated. Profits earned by the subsidiary before it became 
part of the group are not group profits. They reflect what the parent company is getting for its money 
on acquisition.
BPP Tutor Toolkit Copy

---

PART G: PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS 
 
424
 
Applying this to our example, the working will look like this.
$
$
Consideration transferred* 
80,000 
Less value of identifiable assets acquired and liabilities assumed: 
Ordinary share capital 
50,000 
Retained earnings at acquisition 
10,000 
(
(60,000) 
Goodwill 
20,000 
* This is the cost of the investment in Sing Co's statement of financial position. 
SING CO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X1 
$
Assets
Non-current assets
Goodwill arising on consolidation 
20,000 
Current assets
100,000 
120,000 
Capital and reserves 
Ordinary shares 
75,000 
Retained earnings 
45,000 
120,000 
2.2.2 Example: goodwill and pre-acquisition profits continued
Suppose that a year has passed, and you now wish to prepare the consolidated statement of financial 
position for the Sing group as at 31 March 20X2. The individual statements of financial position are as 
follows.
SING CO 
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X2 
$
Assets 
Non-current assets 
Investment in 50,000 shares of Wing Co at cost 
80,000 
Current assets 
50,000 
Total assets 
 
130,000 
Equity and liabilities
Equity 
Ordinary shares 
75,000 
Retained earnings 
55,000 
Total equity and liabilities 
 
130,000 
WING CO
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X2 
$
Current assets 
80,000 
Equity 
50,000 ordinary shares of $1 each 
50,000 
Retained earnings 
30,000 
80,000 
Prepare the consolidated statement of financial position as at 31 March 20X2.
Solution 
We can see from the individual statements of financial position that Wing Co has generated profits of 
$20,000 since being owned by Sing Co, as the retained earnings balance has increased from $10,000 
on acquisition to $30,000 at 31 March 20X2. These profits belong to the group and should be 
consolidated. The technique to adopt here is to produce a new working: 
Retained earnings.
A proforma 
working is set out below. 
BPP Tutor Toolkit Copy

---

CHAPTER 24
//
THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION