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Illustration 2 – D Group
In order to illustrate the various workings involved in a consolidated
statement of financial position we will use the example of D group,
performing each calculation in turn and finally compiling the consolidated
statement of financial position.
The statements of financial position of D and J as at 31 December 20X8.
D J
$
$
Non
current assets:
Property, plant & equipment
85,000
18,000
Investment: Shares in J
60,000
–––––––
145,000
Current assets
160,000
84,000
–––––––
–––––––
305,000
102,000
–––––––
–––––––
Equity:
Equity shares @ $1
65,000
20,000
Share premium
35,000
10,000
Retained earnings
70,000
25,000
–––––––
–––––––
170,000
55,000
Current liabilities
135,000
47,000
–––––––
–––––––
305,000
102,000
–––––––
–––––––
D acquired an 80% holding in J on 1 January 20X8. At this date J's
retained earnings stood at $20,000. On this date, the fair value of the
20% non
controlling shareholding in J was $12,500.
Calculate goodwill arising on the acquisition of J.
Consolidated statement of financial position
412
KAPLAN PUBLISHING
Text Solution to Illustration 2
(W1) Group structure
D
1 Jan X8
80%
Note: NCI = 20%
J
(W2) Net assets of J
At date of
acquisition
At
reporting
date
$
$
Share capital
20,000
20,000
Share premium
10,000
10,000
Retained earnings
20,000
25,000
–––––––
–––––––
Net assets
50,000
55,000
–––––––
–––––––
(W3) Goodwill
$
FV of consideration paid
60,000
FV of NCI at acquisition
12,500
–––––––
72,500
Less: FV of net assets at acquisition (W2)
(50,000)
–––––––
Goodwill on acquisition (to SoFP)
22,500
–––––––
Test your understanding 1
Daniel acquired 80% of the equity share capital of Craig on 31 December
20X6 for $78,000. At this date the fair value of the net assets of Craig
were $85,000. NCI is valued using the fair value method and the fair
value of the NCI at the acquisition date was $19,000.
What goodwill arises on the acquisition?
Chapter 21
KAPLAN PUBLISHING
413
7
Accounting treatment of non-controlling interest
Don't forget that where a group exists the parent controls the subsidiary, so the
accounts of those two entities are consolidated. The non
controlling interests
represent the 'other' shareholders of the subsidiary, where the parent owns less
than 100% of the equity shares.
In the consolidated statement of financial position all of the assets and liabilities
of the parent and subsidiary are added together at the reporting date. They are
NOT APPORTIONED
. On the lower part of the consolidated SoFP an amount is
recognised that allocates a portion (i.e. their share) of the net assets to the non
controlling interests. This effectively recognises their share of the value of the
business.
Illustration 3 – Non-controlling interest
Using the information for D Group from Illustration 2, calculate the
non-controlling interest to include in the statement of financial
position at 31 December 20X8.
Solution to Illustration 3
(W4)
Non-controlling interests
FV of NCI at acquisition (as in W3)
12,500
NCI share of post
acquisition reserves (W2)
(20% × (55,000 – 50,000))
1,000
––––––
13,500
––––––
8
Group retained earnings and other components of equity
Pre-acquisition profits
are the retained earnings of the subsidiary which exist
at the date when control was acquired by the parent. These profits belong to the
previous shareholders as the profits were earned during their period of
ownership. The new parent cannot lay claim to these profits so these profits are
excluded from group retained earnings.
Post-acquisition profits
are those profits recognised in retained earnings by
the subsidiary at the year
end but earned since the new parent purchased its
controlling interest. As these were earned during the ownership of the new
parent an appropriate percentage (based upon the parent's % ownership) can
be recognised in group retained earnings.
Consolidated statement of financial position
414
KAPLAN PUBLISHING
In the same way that retained earnings are allocated between pre
and post
acquisition elements, the same also applies to revaluation surplus if it is part of
the subsidiary's statement of financial position. Normally, you will be provided
with the revaluation surplus value at the date of acquisition, with any amount in
excess of this regarded as a post
acquisition movement.
The mechanics of accounting for the post
acquisition increase in revaluation
surplus are similar to accounting for the increase in retained earnings. If there
has been no change in the revaluation surplus balance between the date of
acquisition and the reporting date of the statement of financial position you are
dealing with, it is treated as a pre
acquisition balance.
If the balance on revaluation surplus has increased between the date of
acquisition and the reporting date of the statement of financial position you are
dealing with, the increase is treated in a similar manner to the increase in
retained earnings. The group share of the increase is included in the
consolidated statement of financial position as a separate component of equity
(don't include it as part of group retained earnings). The non
controlling interest
share of the increase is allocated to the non
controlling interest shareholders
within (W4) of the standard consolidation workings.
Illustration 4 – Retained earnings
Using the information for D Group from Illustration 2, calculate the
group retained earnings to include in the group statement of
financial position at 31 December 20X8.
Solution to Illustration 4
(W5) Group retained earnings
$
100% D's retained earnings
70,000
80% J post
acquisition retained earnings
4,000
80% × ($55,000 – $50,000) (W2)
–––––––
74,000
–––––––
Illustration 5 – The consolidated SoFP
Using the information from Illustration 2 and the consequent
calculations performed, prepare the consolidated statement of
financial position of D Group as at 31 December 20X8.
Chapter 21
KAPLAN PUBLISHING
415
Solution to Illustration 5
D consolidated statement of financial position as at 31 December
20X8
Non
current assets
$
Goodwill (W3)
22,500
PPE ($85,000 + $18,000)
103,000
Current assets ($160,000 + $84,000)
244,000
–––––––
369,500
–––––––
Equity
Share capital
65,000
Share premium
35,000
Group retained earnings (W5)
74,000
Non
controlling interest (W4)
13,500
–––––––
187,500
Current liabilities ($135,000 + $47,000)
182,000
–––––––
369,500
–––––––
9 Fair
values
To ensure that an accurate figure is calculated for goodwill:
•
the consideration paid for a subsidiary must be accounted for at fair value
•
the subsidiary’s identifiable assets and liabilities acquired must be
accounted for at their fair values.
Fair value is defined as
"the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
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