1 Groups and consolidation: an overview

 
422
 
The entries in P Co's books would be: 
DEBIT
Investment in S Co 
$60,000 
CREDIT
Bank 
$60,000 
So P Co's individual statement of financial position will look as follows. 
 
 
P Co 
Non-current assets
$'000 
Property, plant and equipment 
100 
Investment in S Co 
60 
Total assets
160 
Equity and liabilities
Share capital 
160 
Total equity and liabilities
160 
Next we will look at the group financial statements.
Now when the directors of P Co agree to pay $60,000 for a 100% investment in S Co they must believe 
that, in addition to its non-current assets of $40,000, S Co must also have 
intangible assets
worth 
$20,000. This amount of $20,000 paid over and above the value of the tangible assets acquired is 
called the 
goodwill arising on consolidation 
(or sometimes 
premium on acquisition
). 
Following the normal cancellation procedure, the $40,000 share capital in S Co's statement of financial 
position could be cancelled against $40,000 of the 'investment in S Co' in the statement of financial 
position of P Co. This would leave a $20,000 debit uncancelled in the parent company's accounts. This 
$20,000 would appear in the consolidated statement of financial position under the caption 'Intangible 
non-current assets: goodwill arising on consolidation', as follows. 
CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF P GROUP AS AT 31.12.X1
Non-current assets
 
$'000 
 
Property, plant and equipment (100 + 40) 
140 
Intangible non-current assets: goodwill arising on consolidation 
20 
Total assets
160 
Equity and liabilities
Share capital
160 
Total equity and liabilities
160 
2.2 Goodwill and pre-acquisition profits 
Up to now we have assumed that S Co was owned by P Co from incorporation, and therefore we have 
not had to deal with any profits made by S Co before P Co took ownership of it. Assuming instead that
S Co was purchased sometime after incorporation and had earned profits of $8,000 in the period before 
acquisition, its statement of financial position just before the purchase would look as follows. 
$'000
Total assets 
48 
Share capital
40 
Retained earnings
8 
Total equity and liabilities 
48 
If P Co now purchases all the shares in S Co it will acquire total assets worth $48,000 at a cost of 
$60,000. Clearly in this case S Co's intangible assets (goodwill) are being valued at $12,000. It should 
be apparent that any earnings retained by the subsidiary