Topic on consolidate financial position for accounting

1. CONSOLIDATED STATEMENT OF
FINANCIAL POSITION TOPIC 5

2. TOPIC OUTCOMES
At the end of the lesson students should be able to
Prepare consolidated statement of profit or loss, and
other comprehensive income for acquisition in prior
periods and acquisition during the year.
Prepare consolidated statement of financial position for
a single group.
Prepare Statement of Changes in Equity (extract)
(showing the Group Retained Profit and Non Controlling
Interest column)

3. TOPIC OUTCOMES
At the end of the lesson students should be able to
Adjust for:
 Intra-group dividends
 Intra-group debenture interest
 Intra-group sale of inventories
 Intra-group sale of non-current assets (depreciation adjustment)
 Unrealized profit due to intra-group sale of inventories
(unrealized profit on the opening inventories and closing
inventories)
 Unrealized profit on intra-group sale of non-current assets.
 Preference shares in the subsidiary

4. Business combination
Acquire assets and liabilities
Purchase of net assets Acquire control
Acquire ordinary share capital
PARENT / SUBSIDIARY
AMALGAMATION /
ABSORPTION
ACQUISITION
Acquired business goes into liquidation Acquired business still a going
concern

5. BUSINESS COMBINATION
Types of business combination:
Amalgamation  A Bhd + B Bhd = C Bhd
1. Amalgamation occurred when two or more
companies combined together to form a new
company.
2. The old companies have to be wound up.
3. A new company is formed.
4. The new company will acquire the assets and
liabilities of the old companies.
5. Shareholders of old company can become
shareholder of new company.

6. BUSINESS COMBINATION
Absorption  A Bhd + B Bhd = A Bhd or B Bhd
1. Absorption of company occurs when one
dominant company acquired the assets and
liabilities of another company.
2. The company being acquired will be liquidated.
3. No new company is formed.
4. The company that absorbs the small company
will become bigger.
5. Shareholders of company being absorbed will
become shareholders of company that
absorbed them.

7. PARENT AND SUBSIDIARY
Definitions by MFRS 10 Consolidated And Separate
Financial Statements
a PARENT as “an entity that has one or more
subsidiaries”
a SUBSIDIARY as “an entity including an
unincorporated entity such as partnership that is
controlled by another entity (known as a parent)”

8. PARENT AND SUBSIDIARY
a GROUP is a parent and all its subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS are “the financial
statements of a group presented as those of a single
economic entity; consolidated financial statements consists of
consolidated cashflow, consolidated income statement and
consolidated balance sheet.”

9. PARENT AND SUBSIDIARY
Definition by Companies Act 1965 (S.5):
a SUBSIDIARY company:-
one in which the investor company:
 controls composition of board of directors of investee company
or
 controls > 50% of voting power of investee company
 Holds > 50% of issued share capital (excluding preference
shares
A subsidiary of a subsidiary of investor company

10. OBJECTIVE OF PREPARING CFS
Parent co and subsidiaries maintain separate accounting
records and prepare own financial statements.
The relationship of parent and its subsidiaries form a
single commercial entity, referred to as a group. In order
to provide shareholders of holding co the commercial
picture of the group, holding has to prepare a set of
financial statements of groups.
Consolidated financial statements are prepared as though
holding and subsidiary are one entity.

11. PRINCIPLE OF CONTROL
MFRS 10 Consolidated Financial Statements
states:-
An investor shall determine whether it is a
parent by assessing whether it controls the
investee.
The presence of control determines whether
parent-subsidiary relationship exists.
Consequently, financial results of Subsidiary
must be consolidated for group reporting
purpose.

12. PRINCIPLE OF CONTROL
CONTROL is “the power to govern the
financial and operating policies of an entity
so as to obtain benefits from its activities”
When a company (investor) acquired the
majority (> 50%) issued share capital of
another company, the investor co gains
control over the acquired co.

13. NON-CONTROLLING INTEREST
a.k.a MINORITY INTEREST
Referring to group of shareholders who do not
control an entity.
Portion of the profit or loss and net assets of a
subsidiary attributable to equity interest that are
not owned, directly or indirectly through
subsidiaries, by the parent.

14. ASSOCIATE COMPANY
Definition MFRS 128 – an Associate
company “an entity over which investor has
a significant influence and that is neither a
subsidiary nor an interest in a joint venture”
- eg investor company holds directly or
indirectly > 20% voting rights but less than
50% of voting power.

15. CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Group FS are the results of combining the financial
statements of the individual members of the
group and eliminating all inter-company
transactions and balances.
CSOFP is prepared by combining assets & liabilities of
holding co & all subsidiaries, removing all inter co
balances e.g. amount owing/by one member to
another.
Shares acquired by investor co is recorded as
“investment” and disclosed as non-current asset.

16. CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The investment is recorded at the amount of consideration
transferred i.e. cash paid, fair value of non-current assets
given, liabilities assumed, fair value of equity shares issued
or combination of any of them.
Dividends received on these shares will be income for
investor.
CSOFP is actually the statement of financial position of
Holding co and investment in subsidiary is replaced by
assets and liabilities of Subsidiary, including payment for
goodwill.

17. ACQUISITION METHOD
Under this method, business combination is
viewed from acquirer’s perspective.
The acquirer recognizes cost of business
combination, assets acquired, and liabilities
(including contingent liabilities) assumed.

18. CONSIDERATION TRANSFERRED
Consideration transferred is the consideration
paid to acquire the equity shares of the
subsidiary.
When investor co acquires equity shares of
another co, it acquires an interest in the fair value
of assets and liabilities of acquiree co.
Therefore, parent co acquires an interest in the
net assets (share capital and reserves) of the
subsidiary.

19. GOODWILL ON CONSOLIDATION
On acquisition date, goodwill or bargain purchase is
determined
GOODWILL ON CONSOLIDATION only arises in
consolidated financial statement of group.
GOODWILL ON CONSOLIDATION = premium paid to
acquire the shares of subsidiary.
Goodwill = (consideration transferred + NCI) > FV of net
assets of acquire on DOA)

20. EXAMPLE
ABC acquired 8m shares in XYZ at RM3 per share on 1
January 2015. at the date the summary of the SOFP of
XYZ was as follows:
Non current assets
PPE
Current asset
Inventories
Receivables
Cash
RM’000
20,000
4,000
2,000
1,000
27,000
Share capital (10m at RM1)
Reserves
Non current liabilities
Current liabilities
10,000
12,000
3,000
2,000
27,000

21. EXAMPLE
The following information is relevant:
1. the fair value of PPE was RM25,000,000
2. Inventory had net selling price of
RM6,000,000
Required: Calculate goodwill

22. SOLUTION
Consideration transferred (8m x RM3)
NCI (20% x FVNA)
RM’000
24,000
5,800
29,800
(-) FVNA of S at DOA
PPE
Inventories
Receivable
Cash
Non current liabilities
Current liabilities
25,000
6,000
2,000
1,000
(3,000)
(2,000) (29,000)

23. ALTERNATIVE SOLUTION
Consideration transferred (8m x RM3)
NCI (20% x FVNA)
RM’000
24,000
5,800
29,800
(-) FVNA of S at DOA
Share capital
Reserves
FV changes (PPE RM5m + Inventories RM2m)
10,000
12,000
7,000 (29,000)
GOODWILL 800

24. BARGAIN PURCHASE
a.k.a “negative goodwill”
BARGAIN PURCHASE = (consideration transferred +
NCI) < FV of net assets of acquiree on acquisition date
Adjustment JE
To close
Bargain
Purchased
+ Group Retained profit
+ Goodwill
Cr Group Retained profit
Dr Goodwill

25. NON-CONTROLLING INTEREST
If holding co does not have 100% control,
members of subsidiary other than holding
co collectively referred as minority
shareholders.
The interest of minority shareholders in the
operation/net assets of subsidiary is called
“non-controlling interest”.
NCI is considered as equity.

26. NON-CONTROLLING INTEREST
Accounting treatment for NCI
In CSOFP, net assets of both holding & subsidiary
are combined.
But net assets of subsidiary attributable to NCI
shareholders are disclosed separately.

27. NON-CONTROLLING INTEREST
Methods recognizing NCI on acquisition date:-
Option 1: equal to proportionate share of the fair value
of net assets of the subsidiary. Therefore, goodwill
recognised will be the parent’s share of goodwill only i.e
partial goodwill.
Option 2:at fair value of shares held by the non-
controlling shareholders. Therefore, goodwill will be
recognised at full value i.e full goodwill

28. NON-CONTROLLING INTEREST
Holding Subsidiary
Ordinary shares of RM1 each 1,000,000 800,000
Share premium 100,000 40,000
Retained profit 50,000 60,000
Non-current liabilities 70,000 100,000
1,220,000 1,000,000
Sundry assets 420,000 1,000,000
Investment in S – 600,000 Ordinary shares
at cost
800,000
1,220,000 1,000,000
The above statements of financial position of Holding and Subsidiary on
January x2 immediately after Holding had acquired shares in Subsidiary . On 1
January x2, the fair value of Subsidiary’S share was RM1.25 per share.

29. OPTION 1: PARTIAL GOODWILL
1 Consideration transferred 800,000
2 NCI (RM900,000 X 25%) 225,000
1,025,000
3 Shareholder’s funds on 1/1/x2
Ordinary shares of RM1 each 800,000
Share premium 40.000
Retained profit 60,000 900,000
4 Goodwill on consolidation 125,000
Calculation of non-controlling shareholders’ interest
Shareholders’ fund on 1/1/x2 = RM900,000 X 25% = RM225,000
Goodwill on consolidation is recognized based on the
parent’s ownership interest in the subsidiary. No goodwill is
recognized for non-controlling interest.

30. OPTION 2: FULL GOODWILL
1 Consideration transferred 800,000
2 NCI (200,000 Ord shares X RM1.25) 250,000
1,050,000
3 Shareholder’s funds on 1/1/x2
Ordinary shares of RM1 each 800,000
Share premium 40.000
Retained profit 60,000 900,000
4 Goodwill on consolidation 150,000

31. PRE-ACQUISITION RESERVES
Pre-acquisition reserves are all reserves (capital
& revenue reserve) that exist in the subsidiary, on
the date shares are acquired by parent co.
Pre-acquisition reserves are treated as non-
distributable reserves by holding co.
Distribution of reserves will mean a return of
capital for holding co.

32. POST-ACQUISITION RESERVES
Profits and gains (or losses)
made by the subsidiary after
its shares are acquired by
the holding company

33. EXAMPLE
BEFORE
1/1/2020 1/1/2020 31/12/2020
Pre-acquisition Post acquisition

34. ADJUSTMENT IN CSOFP
AFFECT RETAINED
PROFITS/EARNINGS
DOES NOT AFFECT RETAINED
PROFITS/EARNINGS
(Under Depreciation Of NCA) Inter-company balances and transactions
–loans; current account; debtors and
creditors; bills payable and bills
receivable
(all must be eliminate, hence (-))
Over Depreciation Of NCA Items in transit (add back to respective
account)
(Urp From intra group sale of NCA)
(Urp From intra group sale of
inventories)
(Impairment Of Asset/ Goodwill)
(Amortisation Of Asset)
Dividend Or Interest

35. EXEMPTION OF PARENTS TO PRESENT CONSOLIDATED FINANCIAL STATEMENTS
A parent need not present consolidated
financial statements if:- MFRS 10
Consolidated Financial Statements
1. The parent is a wholly-owned subsidiary or is a partially-owned
subsidiary of another entity and all its other owners do not object
to, the parent not presenting consolidated financial statements.
2. The parent co is not a public listed co.
3. The parent is not filing or in the process of filing, its financial
statements with a securities commission to be listed in stock market.
4. Parent’s ultimate or intermediate parent produces consolidated
financial statements that comply with Financial Reporting
Standards.

36. STEPS IN PREPARING CSOFP
1. Calculate the %Holding
= Number of shares or debentures acquired X 100%
Total number of shares or debentures in S
2. Date of acquisition ?
3. Date to prepare the CSOFP ?
4. Analysis of pre and post acquisition reserves
5. Adjustments

37. REVALUATION OF FIXED ASSETS (FIND THE ARR)
for depreciable assets
Motor Vehicles (REDUCING BALANCE METHOD)
Fair Value (as date of acquisition) XX
Book value (as date of acquisition) XX (BV X 100/100- y%)
ARR/SURPLUS XXX
Changes in depreciation (to find whether over or under depreciate)
Fair Value ( y% x FV) XX
Book value (y% x BV) XX
Over/under depreciation XXX
for non - depreciable assets
Land – Fair Value (as date of acquisition) XX
Book value (as date of acquisition) XX
ARR/SURPLUS XXX

38. REVALUATION OF FIXED ASSETS (FIND
THE ARR)
Adjustment JE
Surplus + Assets
+ARR
Dr Asset
Cr ARR
Deficit - ARR
- Asset
Dr ARR
Cr Asset
Under
depreciation
- Retained profit
- Asset
Dr Retained Profit
Cr Asset
Over depreciation + Asset
+ Retained profit
Dr Asset
Cr Retained Profit

39. DIVIDEND FROM POST ACQUISITION PROFIT
Investor co can recognize it as income (as dividend received from
Subsidiary Co):
Dividend and interest payable
H (-) S (-)
Ordinary
dividend
y% × issued and fully
paid up
y% × issued and
fully paid up = 1000
Preference
dividend
y% × issued and fully
paid up
y% × issued and
fully paid up = 2000
Interest on
debenture
y% × debenture y% × debenture =
500

40. UNRECORDED DIVIDEND/
INTEREST PAYABLE
Adjustment JE
H - Retained profit (H)
+ ODP/ PDP/ IP
Dr Retained profit (H)
Cr ODP/ PDP/ IP
S - Retained profit (S)
+ ODP/ PDP/ IP
Dr Retained profit (s)
Cr ODP/ PDP/ IP

41. Dividend and interest received
H ( +) CSOFP
Ordinary
dividend
75% × 1000 = 750 1000-750 = 250
Preference
dividend
60 % × 2000 = 1200 2000-1200 = 800
Interest on
debenture
20% × 500 = 100 500-100 = 400
Identify whether the dividends / interest have been
recorded or not.
If the dividends /interest have been recorded (which
stated in the CL/CA), you do not have to record in the
schedule.
If the dividends / interest have NOT been recorded then
you have to record them in the schedule.

42. UNRECORDED DIVIDEND/
INTEREST RECEIVABLE BY
H FROM S
Adjustment JE
- ODP(S)/ PDP(S)/ IP(S)
+ Retained profit (H)
Dr ODP(S)/ PDP(S)/ IP(S)
Cr Retained profit (H)

43. BONUS ISSUES
Bonus Share/Issue [ a/b X issued and fully paid up]
a) If Holding company issue the bonus share =
+ OSC in the CSOFP
- Reserves of Holding company
If Subsidiary Co. issues the bonus share, identify whether the bonus
share will be taken from PRE or POST reserves a/c.
Out of PRE = + OSC in the schedule
- PRE and Y/E
Out of POST = + OSC in the schedule
- POST and Y/E
Capital Reserve (FROZEN) = %H X Bonus share

44. BONUS ISSUES (BI)
Adjustment JE
Issued by H
out of pre
reserve
- Reserve (H)
+ OSC (H)
(with the total amount of BI)
Dr Reserve (H)
Cr OSC (H)
Issued by S
out of pre
reserve
- Pre reserve (S)
+ OSC (S)
(with the total amount of BI)
Dr Pre reserve (S)
Cr OSC (S)
Issued by S
out of post
reserve
- Post reserve (S)
+ OSC (S)
(with the total amount of BI)
+ Goodwill
+ Capital reserve
(with %H of the BI)
Dr Post reserve (S)
Cr OSC (S)
Dr Goodwill
Cr Capital reserve

45. SALE OF INVENTORY
Identify who sold the inventory
Calculate unrealized profit and eliminate it;
if % on cost = %/(100+ %) X stock remain unsold
If % on invoice price = %/100 X stock remain unsold
Adjustment JE
URP on
unsold
inventories
- Retained profit (Seller)
- Closing inventories
Dr Retained profit (Seller)
Cr Closing inventories

46. SALE OF NCA
Identify who sold the NCA
Calculate unrealized profit and eliminate it
(Selling price minus book value)
Calculate changes in depreciation
Adjustment JE
URP on NCA
(SP – CV)
- Retained profit (Seller)
- NCA
Dr Retained profit (Seller)
Cr NCA
Over
depreciation
+ Retained profit (Seller)
+ NCA
Cr Retained profit (Seller)
Dr NCA

47. ITEMS IN TRANSIT
Cash remittance and dispatch of other assets, such as inventories, by
one party but the other party has not received them as at the
statement of financial position date
Adjusted for in the accounts of the holding company