1 Groups and consolidation: an overview

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 
aggregated with the parent company's retained earnings 
in the consolidated statement of financial 
position. The figure of consolidated retained earnings comprises the retained earnings of the parent 
company plus the 
post-acquisition retained earnings only of subsidiary companies
. The post-acquisition 
retained earnings are simply retained earnings now 
less
 
retained earnings at acquisition. 
BPP Tutor Toolkit Copy

---

CHAPTER 24
//
THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION 
 
423 
Other reserves, such as the 
revaluation surplus
, are treated in the same way as retained earnings. 
2.2.1 Example: goodwill and pre-acquisition profits 
Sing Co acquired the ordinary shares of Wing Co on 31 March 20X1 when the draft statements of 
financial position of each company were as follows. 
SING CO 
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X1 
$
Assets 
Non-current assets 
Investment in 50,000 shares of Wing Co at cost 
80,000 
Current assets 
40,000 
Total assets 
 
120,000 
Equity and liabilities
Equity 
Ordinary shares 
75,000 
Retained earnings 
45,000 
Total equity and liabilities 
 
120,000 
WING CO
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X1 
$
Current assets 
60,000 
Equity 
50,000 ordinary shares of $1 each 
50,000 
Retained earnings 
10,000 
60,000 
Prepare the consolidated statement of financial position as at 31 March 20X1.
Solution 
The technique to adopt here is to produce a new working: 
Goodwill
. A proforma working is set out below. 
Goodwill 
$ $ 
Consideration transferred 
X 
Less value of identifiable assets acquired and liabilities assumed*: 
Ordinary share capital 
X 
Share 
premium 
X 
Retained earnings at acquisition 
X 
(X) 
Goodwill
X 
* We use this wording because it best reflects the wording IFRS 3 uses. Don't let it confuse you; 
remember that that: assets – liabilities = capital, so the value of assets acquired and liabilities assumed 
is equal to the share capital and reserves of the company.