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EXAM FOCUS POINT
You will probably have to calculate the unrealised profit given either a gross profit margin or a mark-up
on cost. Remember that:
Mark-up is the profit as a percentage of cost.
Gross profit margin is the profit as a percentage of sales.
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THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION
435
Note that the adjustment to the NCI only occurs when the sale is from the subsidiary to the parent
(where the unrealised profit is in the subsidiary). If the sale was from the parent to the subsidiary, then
there is no adjustment to the NCI.
4.3 Example: NCIs and intra-group trading
P Co acquired 75% of the shares in S Co on 1 January 20X2 when the retained earnings of S Co stood
at $10,000. The fair value of the NCI at the date of acquisition was $15,000. During the year to
31 December 20X2, S Co sold goods to P Co for $20,000 at a mark-up of 25%. 50% of these goods
were still unsold by P Co at the end of the year. 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.
Draft statements of financial position of each company at 31 December 20X2 were 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
Required
Prepare a draft consolidated statement of financial position for P Co.
Solution
P CO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X2
$
$
Assets
Non-current assets
Tangible assets (80,000 + 40,000)
120,000
Goodwill (W1)
21,000
Current assets
Trade receivables (30,000 + 25,000 – 12,000)
43,000
Inventories (10,000 + 5,000 – 2,000 (W2))
13,000
56,000
Total assets
197,000
Equity and liabilities
Equity attributable to owners of the parent
Ordinary shares of $1 each
100,000
Retained earnings (W3)
52,500
152,000
NCI (W4)
17,500
170,000
Current liabilities (21,000 + 18,000 – 12,000)
27,000
Total equity and liabilities
197,000
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PART G: PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS
436
Workings
1
Goodwill
$
$
Fair value of consideration transferred
46,000
Plus fair value of NCI at acquisition
15,000
Less net acquisition-date fair value of identifiable assets acquired
and liabilities assumed:
Share capital
30,000
Retained earnings
10,000
40,000
Goodwill
21,000
2
Provision for unrealised profit
$
Sale price
125%
20,000
Cost price
100%
(16,000)
Gross profit
25%
4,000
Unrealised profit (4,000 50%)
2,000
Unrealised profit attributable to group (2,000 75%)
1,500
Unrealised profit attributable to NCI (2,000 25%)
500
3
Retained earnings
P Co
S Co
$
$
Per
question
45,000
22,000
Adjustments (unrealised profit attributable to P (W2))
(1,500)
–
Pre-acquisition retained earnings
(10,000)
12,000
Group share of post-acq'n ret'd earnings:
S Co (75% 12,000)
9,000
Group retained earnings
52,500
4
NCI at reporting date
$
Fair value of NCI at acquisition
15,000
Plus NCI's share of post-acquisition retained earnings (25% 12,000)
3,000
Less unrealised profit attributable to NCI (W2)
(500)
NCI at reporting date
17,500
5
Acquisition of a subsidiary part way through the year
When a parent acquires a subsidiary part way through the year, the profits for the period need to be
apportioned between pre- and post-acquisition. Only post-acquisition profits are included in the group's
consolidated statement of financial position.
In the examples we have looked at already in this chapter, the subsidiary was conveniently purchased on
the first day of the accounting period. However, in practice this will probably not be the case!
If a parent purchases a subsidiary company during the year, as we have already seen, at the end of the
accounting year it will be necessary to prepare consolidated accounts.
The subsidiary's accounts to be consolidated will show the subsidiary's profit or loss for the whole year.
For consolidation purposes, however, it will be necessary to distinguish between:
(a)
Profits earned before acquisition – so that we can calculate goodwill
(b)
Profits earned after acquisition – so that we can calculate group retained earnings
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THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION
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To do this, we usually assume that the subsidiary's profits accrue evenly over the year. Then we can take
the profit for the year and calculate the pre- and post-acquisition profits based on the number of months
the parent has owned the subsidiary.
QUESTION
Acquisition during the year
Hinge Co acquired 80% of the ordinary shares of Singe Co on 1 April 20X5. On 31 December 20X4
Singe Co's accounts showed a revaluation surplus of $4,000 and retained earnings of $15,000. The fair
value of the NCI at acquisition was $7,000. The statements of financial position of the two companies at
31 December 20X5 are set out below.
HINGE CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5
$
$
Assets
Non-current assets
Property, plant and equipment
32,000
16,000 ordinary shares of 50c each in Singe Co
50,000
82,000
Current assets
85,000
Total assets
167,000
Equity and liabilities
Equity
Ordinary shares of $1 each
100,000
Revaluation surplus
7,000
Retained earnings
40,000
147,000
Current liabilities
20,000
Total equity and liabilities
167,000
SINGE CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5
$
$
Assets
Property, plant and equipment
30,000
Current assets
43,000
Total assets
73,000
Equity and liabilities
Equity
20,000 ordinary shares of 50c each
10,000
Revaluation surplus
4,000
Retained earnings
39,000
53,000
Current liabilities
20,000
Total equity and liabilities
73,000
Required
Prepare the consolidated statement of financial position of Hinge Co at 31 December 20X5. You should
assume that profits have accrued evenly over the year to 31 December 20X5.
(15 marks)
EXAM FOCUS POINT
We have allocated 15 marks to the above question, as an indication of the type of question that could
arise in the exam. However, the ACCA examining team has indicated that a 15 mark consolidation
question could include a small amount of interpretation, which is covered in Chapter 26. A combined
consolidation and interpretation question is included in the Practice Question Bank.
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