On 31 December 20X8 Pandora Co acquired 4m of the 5m $1 ordinary shares of Sylvester Co, paying
$10m cash. On that date the fair value of Sylvester's net assets was $7.5m.
The market price of the shares held by the non-controlling shareholders just before the acquisition was
$2.00. What is goodwill in the consolidated statement of financial position?
PART G: PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS
432
ANSWER
D
$'000
Fair value of consideration transferred
10,000
Fair value of NCI ($2 1m)
2,000
12,000
Less net acquisition-date fair value of identifiable assets
acquired and liabilities assumed
(7,500)
Goodwill
4,500
4
Intra-group trading
A consolidation adjustment is required to remove unrealised profit on intra-group trading (IFRS 10,
para. B86(c)).
We have already come across cases where one company in a group engages in trading with another
group company. Any receivable/payable balances outstanding between the companies are cancelled on
consolidation. No further problem arises if all such intra-group transactions are undertaken at cost,
without any mark-up for profit.
However, each company in a group is a separate trading entity and may wish to treat other group
companies in the same way as any other customer. In this case, a company (say A Co) may buy goods at
one price and sell them at a higher price to another group company (B Co). The accounts of A Co will
quite properly include the profit earned on sales to B Co. Similarly, B Co's statement of financial position
will include inventories at their cost to B Co, ie at the amount at which they were purchased from A Co.
This gives rise to two problems.
(a)
Although A Co makes a profit as soon as it sells goods to B Co, the group does not make a sale or
achieve a profit until an outside customer buys the goods from B Co.
(b)
Any purchases from A Co which remain unsold by B Co at the year end will be included in B Co's
inventory. Their statement of financial position value will be their cost to B Co, which is not the
same as their cost to the group.
The objective of consolidated accounts is to present the financial position of several connected
companies as that of a single entity, the group. This means that in a consolidated statement of financial
position the only profits recognised should be those earned by the group in providing goods or services
for outsiders. Similarly, inventory in the consolidated statement of financial position should be valued at
cost to the group.
4.1 Example: intra-group trading and unrealised profits
Suppose that a holding company P Co buys goods for $1,600 and sells them to a wholly owned
subsidiary S Co for $2,000. The goods are all still in S Co's inventory at the year end and appear in
S Co's statement of financial position at $2,000. In this case, P Co will record a profit of $400 in its
individual accounts, but from the group's point of view the figures are:
Cost
$1,600
External sales
nil
Closing inventory at cost
$1,600
Profit/loss nil
If we add together the figures for retained reserves and inventory in the individual statements of financial
position of P Co and S Co, the resulting figures for consolidated reserves and consolidated inventory will
each be overstated by $400. A consolidation adjustment is therefore necessary as follows.
DEBIT
Group reserves
CREDIT
Group inventory (statement of financial position)
with the amount of profit unrealised by the group.
We call this the 'provision for unrealised profit' or PUP, as it is a provision against inventory for the
unrealised profit generated by the intra-group sale.
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CHAPTER 24
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THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION
433
QUESTION
Consolidated financial statements
P Co acquired all the shares in S Co one year ago when the retained earnings of S Co stood at $10,000.
Draft statements of financial position for each company are as follows.
P Co
S Co
$
$
$
$
Assets
Non-current assets
Tangible assets
80,000
40,000
Investment in S Co at cost
46,000
126,000
Current assets
Trade receivables
30,000
25,000
Inventories
10,000
5,000
40,000
30,000
Total assets
166,000
70,000
Equity and liabilities
Equity
Ordinary shares of $1 each
100,000
30,000
Retained earnings
45,000
22,000
145,000
52,000
Current liabilities
Trade payables
21,000
18,000
Total equity and liabilities
166,000
70,000
During the year S Co sold goods to P Co for $50,000, the profit to S Co being 20% of selling price. At
the period end, 25% of these goods remained unsold in the inventories of P Co. At the same date, P Co
owed S Co $12,000 for goods bought and this debt is included in the trade payables of P Co and the
trade receivables of S Co.
Required
Prepare a draft consolidated statement of financial position for P Co.
ANSWER
P CO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
$
$
Assets
Non-current assets
Tangible assets
120,000
Goodwill (W1)
6,000
126,000
Current assets
Trade receivables (30,000 + 25,000 – 12,000*)
43,000
Inventories (10,000 + 5,000 – 2,500**(W2))
12,500
55,500
Total assets
181,500
Equity and liabilities
Equity
Ordinary shares of $1 each
100,000
Retained earnings (W3)
54,500
154,500
Current liabilities
Trade payables (21,000 + 18,000 – 12,000*)
27,000
Total equity and liabilities
181,500
* To cancel the intra-group receivable and payable
** To remove the unrealised profit on items still in inventories
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