I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART G: PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS 

 

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 prior to its acquisition by the parent company 

must be incorporated in the cancellation process so as to arrive at a figure for goodwill arising on 

consolidation. In other words, not only S Co's share capital but also its pre-acquisition retained earnings 

must be cancelled against the asset 'investment in S Co' in the accounts of the parent company. The 

uncancelled balance of $12,000 appears in the consolidated statement of financial position. 

The consequence of this is that any pre-acquisition retained earnings of a subsidiary company are not