1 Groups and consolidation: an overview

show
the 
extent
to which you do not
own 
everything. 
What does this mean? Consider the following example. 
1.3 Example: basic principles of consolidation 
Consolidate as if you owned everything, and then show the extent to which you do not.
There are two companies, Pleasant and Sweet. Pleasant owns 80% of the shares in Sweet. Pleasant has 
a head office building worth $100,000. Sweet has a factory worth $80,000. Remember that 
consolidation means presenting the results of two or more companies as if they were one. 
Adding together 
You add together the values of the head office building and the factory to get an asset, land and 
buildings, in the group accounts of $100,000 + $80,000 = $180,000. So far so good; this is what you 
would expect consolidation to mean. 
 EXAM FOCUS POINT 
This is an important area so make sure you read carefully this and the following two chapters and 
attempt all the examples and questions. You should also make sure that you attempt the questions on 
this topic, including the long questions, in the Practice & Revision Kit for FFA/FA.
BPP Tutor Toolkit Copy

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PART G: PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS 
 
406
 
Intra-group debts 
Suppose Pleasant has receivables of $40,000 and Sweet has receivables of $30,000. Included in the 
receivables of Pleasant is $5,000 owed by Sweet. Remember again that consolidation means presenting 
the results of the two companies as if they were one. 
Do we then simply add together $40,000 and $30,000 to arrive at the figure for consolidated 
receivables? We cannot simply do this, because $5,000 of the receivables is owed within the group. This 
amount is irrelevant when we consider what the group as a whole is owed. 
Further, suppose that Pleasant has payables of $50,000 and Sweet has payables of $45,000. We 
already know that $5,000 of Sweet's payables is a balance owed to Pleasant. If we just added the 
figures together, we would not reflect fairly the amount the group owes to the outside world. The outside 
world does not care what these companies owe to each other – that is an internal matter for the group.