Parent Co has just bought 100% of the shares of Subsidiary Co. Below are the statements of financial
PART G: PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS
420
Required
Prepare the consolidated statement of financial position of P Co.
1.4
Solution
The cancelling items are as follows.
(a)
P Co's asset 'investment in shares of S Co' ($40,000) cancels with S Co's liability 'share capital'
($40,000).
(b)
P Co's asset 'receivables: S Co' ($2,000) cancels with S Co's liability 'payables: P Co' ($2,000).
The remaining assets and liabilities are added together to produce the following consolidated statement
of financial position.
P CO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X6
$
$
Assets
Non-current assets
Property, plant and equipment (35 + 45)
80,000
Current assets
Inventories (16 + 12)
28,000
Receivables (6 + 9)
15,000
Cash at bank
1,000
44,000
Total assets
124,000
Equity and liabilities
Equity
$1 ordinary shares (P Co only)
70,000
Retained earnings (16 + 19)
35,000
105,000
Current liabilities
Bank overdraft
3,000
Payables (14 + 2)
16,000
19,000
Total equity and liabilities
124,000
Notes
1 P
Co's
bank
balance
is
not netted off with S Co's bank overdraft. To offset one against the other
would be less informative and would conflict with the principle that assets and liabilities should
not be netted off.
2
The share capital in the consolidated statement of financial position is the share capital of the
parent company alone. This must
always be the case, no matter how complex the consolidation,
because the share capital of subsidiary companies must always be a wholly cancelling item.
1.5 Part cancellation
An item may appear in the statements of financial position of a parent company and its subsidiary, but
not at the same amounts.
(a)
The parent company may have acquired
shares in the subsidiary at a price
greater or less than
their face (or 'par') value. The asset will appear in the parent company's accounts at cost, while
the equity will appear in the subsidiary's accounts at par value. This raises the issue of goodwill,
which we will deal with next.
(b)
Even if the parent company acquired shares at par value, it
may not have
acquired all the shares
of the subsidiary (so the subsidiary may be only partly owned). This raises the issue of
non-
controlling interests, which we will deal with later in the chapter.
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CHAPTER 24
//
THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION
421
2
Goodwill arising on consolidation
Goodwill arising on consolidation is recognised as an intangible asset in the consolidated statement of
financial position (IFRS 3, para. 32).
In the examples we have looked at so far the cost of shares acquired by the parent company has always
been equal to the par value of those shares. This is seldom the case in practice and we must now
consider some more complicated examples. We will do this through the following example.
2.1 Example: goodwill arising on consolidation
P Co purchased all of the share capital (40,000 $1 shares) of S Co for $60,000 in cash. The statements
of financial position of P Co and S Co prior to the acquisition are as follows.
STATEMENTS OF FINANCIAL POSITION AS AT 31.12.X1
P Co
S Co
Non-current assets
$'000
$'000
Property, plant and equipment
100
40
Cash at bank
60
–
Total assets
160
40
Equity and liabilities
Share capital
160
40
Total equity and liabilities
160
40
Firstly we will examine the entries made by the parent company in its own statement of financial position
when it acquires the shares.
EXAM FOCUS POINT
You are highly likely to get a question requiring the calculation of goodwill in your exam so make sure
you go through this section carefully, working through all the examples and the question. The ACCA
examining team has highlighted the calculation of goodwill as a topic which is poorly answered in the
exams.
EXAM FOCUS POINT
There is a technical article on the ACCA's website on the preparation of consolidated financial
statements, written by a member of the examining team. We recommend that you read this article –
called 'Preparing simple consolidated financial statements' – as part of your studies for the FFA/FA
exam.
There is also an article specifically on the consolidated statement of financial position – called
'Preparing a group statement of financial position' – and we recommend you read this article as well.
Furthermore, it is advisable to note the following common errors in preparing consolidated financial
statements, highlighted by the examining team:
(a)
In valuing goodwill, deducting the fair value of the NCI from the consideration instead of
adding it on.
(b)
Not adjusting for intra-group balances. Amounts owed between the parent and subsidiary
should be eliminated from receivables and payables in the consolidated statement of financial
position.
(c)
Not adjusting for intra-group transactions. Intra-group sales should be eliminated from revenue
and cost of sales in the consolidated statement of profit or loss.
(d)
Incorrectly adding together the equity share capital of the parent and subsidiary. The share
capital in the consolidated statement of financial position should be only that of the parent.
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