1 Groups and consolidation: an overview

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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