PART G: PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS
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C H A P T E R
TOPIC LIST
SYLLABUS
REFERENCE
1 Groups and consolidation: an overview
G1(a),(b)
2 Subsidiaries
G1(a),(b)
3 Associates and trade investments
G2 (a)–(c)
4 Content of consolidated financial statements
G1(c)
Introduction
to consolidated
financial statements
Preparing consolidated financial statements is an important area of
your syllabus.
In this chapter we will look at the basic principles of consolidation
and the definitions given in the relevant IFRSs. These matters are
fundamental to your comprehension of consolidation, so make sure
you go through this chapter carefully.
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PART G: PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS
404
Study Guide
Intellectual level
G Preparing simple consolidated financial statements
1 Subsidiaries
(a) Define and describe the following terms in the context of
group accounting:
(i) Parent
(ii) Subsidiary
(iii) Control
(iv) Consolidated or group financial statements
(v) Non-controlling
interest
(vi) Trade/simple investment
K
(b) Identify subsidiaries within a group structure.
K
(c) Describe the components of and prepare a consolidated
statement of financial position or extracts thereof including:
(i) Fair value adjustments at acquisition on land and
buildings (excluding depreciation adjustments)
(ii) Fair value of consideration transferred from cash and
shares (excluding deferred and contingent consideration)
(iii) Elimination of intra-group trading balances (excluding
cash and goods in transit)
(iv) Removal of unrealised profit arising on intra-group
trading
(v) Acquisition of subsidiaries part way through the financial
year
S
2 Associates
(a) Define and identify an associate and significant influence and
identify the situations where significant influence exists.
K
(b) Describe the key features of a parent-associate relationship
and be able to identify an associate within a group structure.
K
(c) Describe the principle of equity accounting.
K
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CHAPTER 23
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INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS
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1
Groups and consolidation: an overview
Consolidation means presenting the results, assets and liabilities of a group of companies as if they were
one company.
You will probably know that many large companies actually consist of several companies controlled by
one central or administrative company. Together, these companies are called a group.
1.1 How does a group arise?
The central company, called a parent, generally owns most or all of the shares in the other companies,
which are called subsidiaries.
The parent company usually controls the subsidiary by owning most of the shares in that company, but
share ownership is not always the same as control, which can arise in other ways.
Businesses may operate as a group for all sorts of practical reasons. If you were going out for a pizza, you
might go to Pizza Hut; if you wanted some fried chicken you might go to KFC. Both sound more
appetising than 'Yum! Brands Inc', the parent company of these subsidiaries.
However, from the legal point of view, the results of a group must be presented as a whole. In other
words, they need to be consolidated. Consolidation will be defined more formally later in the chapter.
Basically, it means presenting the results of a group of companies as if they were a single company.
1.2 What does consolidation involve?
Before moving on to the formal definitions, think about what consolidation involves.
Consolidation
means
adding together.
Consolidation
means
cancellation of like items internal to the group.
Consolidate as if you owned everything then show the extent to which you do not own
everything.
What does this mean? Consider the following example.
1.3 Example: basic principles of consolidation
Consolidate as if you owned everything, and then show the extent to which you do not.
There are two companies, Pleasant and Sweet. Pleasant owns 80% of the shares in Sweet. Pleasant has
a head office building worth $100,000. Sweet has a factory worth $80,000. Remember that
consolidation means presenting the results of two or more companies as if they were one.
Adding together
You add together the values of the head office building and the factory to get an asset, land and
buildings, in the group accounts of $100,000 + $80,000 = $180,000. So far so good; this is what you
would expect consolidation to mean.
EXAM FOCUS POINT
This is an important area so make sure you read carefully this and the following two chapters and
attempt all the examples and questions. You should also make sure that you attempt the questions on
this topic, including the long questions, in the Practice & Revision Kit for FFA/FA.
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