NSMSH Lecture ACCA F3 FA Consolidation of Financial Statementsdated financial statements.pptx

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Preparing simple consolidated financial statements
Ref: OLI-ACCA-F3-G-01

Contents
 Preparatory steps for simple consolidation of
financial statements
 Understand the key terms / procedures involved
in light of examples
 Practice simple consolidation from ACCA
examination point of view

A sample Group of Companies (Parent Co & Subsidiaries)
Source:https://blog.stockedge.com/mukesh-ambani-reliance-group/

The entity that controls one or more
entities, i.e all its subsidiaries
The entities that are controlled by another entity
(Parent Company)
A sample diagram of Group of Companies

Group: A parent and all its subsidiaries
Parent: An entity that
controls one or more
entities. {Parent
company of the
Group of companies}
Subsidiary: An entity
that is controlled by
another entity
{known as the parent}
Definitions of Key Terms
This Group of companies (Parent & Subidiaries) system protects
assets of various properties from each other’s liabilities.

Consolidation means presenting the results, assets
and liabilities of a group of companies as if they
were one company.
Source: tallysolutions.com

Consolidation means presenting the results, assets and liabilities of a
group of companies as if they were one company.
 From the legal point of view, the results of a
group must be presented as a whole.
 In a group of companies, the central company,
called a parent, generally owns most or all of the
shares in the other companies, which are called
subsidiaries.

Rights & Responsibilities of the Parent (Holding) Company:
 Rights
 Holds more than 50% of the rights in the subsidiary company
 Controlling power over the subsidiary company
 Maintains voting rights regarding the subsidiary company
 Responsibilities
o Needs to report its financials by including those of the subsidiary
company as well, since it holds 50% or more of the rights in the
subsidiary company.
o Responsible for tax obligations of the subsidiary as well.
o Liable for the sister concern’s (subsidiaries) operation of business
and management of resources in its location.
o Sometimes serves as a guarantor for the subsidiary in their financial
requirements

Control:- An investor
controls an investee
- when the investor is
exposed, or has rights,
- to variable returns from its involvement
with the investee
- and has the ability to affect those returns
through its power over the investee.

 Power:- Existing rights that give the current ability
to direct the relevant activities.
o The parent company typically maintains financial control,
although the subsidiary benefits in turn with increased access to
funding sources and a reduction in expense costs.
o The degree of control the parent company chooses to exert will
determine a subsidiary’s level of independence.
o For transparency purposes, a parent company will clearly define
the financial and operational delegations of authority at the
outset.

 Non-controlling interest:- The equity in a
subsidiary not attributable, directly or
indirectly, to a parent. (IFRS 10, Appendix A)
Parent Co’s Assets
Subsidiary 1’s Assets
Subsidiary 2’s Assets
Equity attributable to Parent
Non-Controlling interest
Parent Co’s Liabilities
Subsidiary 1’s Liabilities
Subsidiary 2’s Liabilities
E.g. Parent
holding 60% of
shares on
subsidiary co
and the
remaining 40%
by others

Non-controlling interest (NCI) is defined as
o a part of the net assets and net results of
operations of any subsidiary which is a part of
the holding company.
o NCI are not owned directly or indirectly through
any subsidiary’s interest by the holding
company.
o NCI is the share capital of the subsidiary
related to outsiders and the reserves and
profits of the subsidiary company.

Example P Co (Parent or Holding company) acquired 80% of equity
shares of a S Co (subsidiary company). The price at which the deal
was done was $8, 00,000 and it was done on 1st January 2021. S Co
had equity shares of $ 8,00,000 and reserves and a surplus of
$60,000. Calculate the Non-controlling interest.
Particulars Total
Holding Company
Controlling Interest (80%)
Non controlling interest (
20%)
Share Capital 800,000.00 640,000.00 160,000.00
Reserve 60,000.00 48,000.00 12,000.00
860,000.00 688,000.00 172,000.00

 A trade (or 'simple') investment:- An investment
in the shares of another entity, that is held for the
accretion of wealth, and is not an associate or a
subsidiary.

Source:https://annualreporting.info/consolidated-financial-statements/
Overview of Consolidation Process

Consolidation Step-by-Step
1. Combine financial statements of each group entity
(Parent and Subsidiaries)
2. Eliminate intra-groups transactions and balances
3. Eliminate the parent’s investment in each
subsidiary and recognize goodwill and other
business combination related adjustments
4. Allocate comprehensive income and equity to
Non-Controlling Interests (NCI)

Key calculation (for presenting only) involves in consolidation
• Cancellation of like items internal to the group
• Adding together uncancelled items (for each category)
• Sum up and present as if you (the parent company)
owned everything
• then show the extent to which you do not own
everything.

Example
Consolidate as if you owned everything, and then show the extent to
which you do not. Example:
• 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.
Consolidation: (for the purpose of presentation)
 Adding 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. But this is not so simple! …

Example
Consolidate as if you owned everything, and then show the extent to which you do not.
Example: 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. Consolidation: (for the purpose of presentation)
 Adding 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.
 But we are not telling the whole story!. The consolidation statement must show the
extent to which the parent company do not own everything!
 There may well be one or more shareholders who own the remaining 20% of the
shares in Sweet Ltd. These shareholders cannot visit 20% of the factory or tell 20% of
the workforce what to do, but they do have an interest in 20% of the net assets of
Sweet. Therefore, the statement must show this non-controlling interest separately in
the equity section of the consolidated statement of financial position.

Example – Consolidate (adding together)
Apple Co owns 60% of Pear Co. Apple has non-current assets of
$80,000 and Pear has non-current assets of $50,000.
Consolidated non-current assets is calculated as:
 $ Apple 80,000 + Pear (60% of $50,000) 30,000 = 110,000
 $ Apple 80,000 + Pear $50,000 = 130,000
• Pear is a subsidiary of Apple, which controls all its
non-current assets, not just 60%.
• The 40% non-controlling interest is accounted for
separately.

Example – Consolidate (cancelling the intra-group items)
Suppose Apple Co has receivables of 40,000 and
payables of 50,000; and Pear Co has receivables of
30,000 and payables of 45,000. Included in the above
items, a due from Pear to Apple 5000.
{Remember that consolidation means presenting the
results of the two companies as if they were one.} So,
cancelling intra-group items, Consolidated 
• Receivables = (40,000 – 5,000) + 30,000 = 65,000
• Payables = 50,000 + (45,000 – 5,000) = 90,000

Apple Co owns 60% of Pear Co. Apple has receivables
of $60,000 and Pear has receivables of $40,000. Pear
owes Apple $10,000. What are consolidated
receivables? Consolidated receivables: 
 Apple 60,000
 intra-group 10,000
 Pear 40,000
 Consolidated = 90,000.

Apple Co owns 60% of Pear Co. Pear has payables of
$90,000, of which $10,000 is owed to Apple. Apple has
payables of $120,000.
Consolidated payables: 
 Apple 120,000
 Pear 90,000
 intra-group 10,000
 Consolidated = 200,000.

CONTROL aspects : Parent Vs. Subsidiaries
 Control is the most important point to consider
while consolidation of the reporting as investments
in subsidiaries.
 Control will involve the holding company or parent
owning a majority of the ordinary shares in the
subsidiary (to which normal voting rights are
attached).

CONTROL aspects : Parent Vs. Subsidiaries
 There are circumstances, however, when the parent
may own only a minority of the voting power in the
subsidiary, but the parent still has control.
 Control can usually be assumed to exist when the
parent owns more than half (ie over 50%) of the
voting power of an entity unless it can be clearly
shown that such ownership does not constitute
control (these situations will be very rare)

CONTROL aspects : when ownership criterion does not exist
(when Parent owns 50% or less of the voting power of an entity)
The parent has power:-
• over more than 50% of the voting rights by virtue of agreement
with other investors.
• to govern the financial and operating policies of the entity by
statute or under an agreement.
• to appoint or remove a majority of members of the board of
directors (or equivalent governing body).
• to cast a majority of votes at meetings of the board of directors.

IFRS 10 (para B86) – procedures for consolidation of financial statements
1. Take the individual accounts of the parent company and each
subsidiary and cancel out items which appear as an asset in one
company and a liability in another.
2. Add together all the uncancelled assets and liabilities throughout
the group on a line by line basis.
Items requiring cancellation may include the following:
(a) The asset 'investment in subsidiary companies' which appears in the parent company's
accounts will be matched with the liability 'share capital' in the subsidiaries' accounts.
(b) There may be intra-group trading within the group. For example, Subsidiary Co may sell
goods on credit to Parent Co. Parent Co would then be a receivable in the accounts of
Subsidiary Co, while Subsidiary Co would be a payable in the accounts of Parent Co.

Example of cancelling out items:
Parent Co has just bought 100% of the shares of Subsidiary Co. Below are the statements of
financial position of both companies just before consolidation.
PARENT CO STATEMENT OF SUBSIDIARY CO STATEMENT OF
FINANCIAL POSITION '000 FINANCIAL POSITION '000
Consolidated statement would report:
Receivables (30+20) = 50; Share capital = 80.
Cash = 30;

Example of cancelling out intra-group trading:
Statement of Financial Position Parent Co Subs. Co Group Working for Group consolidation
Non-current assets
Property, Plan & Equipment
Investment 40000 $1 shares in
subsidiary co at cost
35,000
40,000
45,000
Current assets
Inventories
Receivables: subsidiary co
others
Cash at bank
16,000
2,000
6,000
1,000
12,000
9,000
Total assets 100,000 66,000
Equity
$1 ordinary shares
Retained earnings
Current liabilities
Bank overdraft
Payables: Parent Co
Payables: Other
70,000
16,000
14,000
40,000
19,000
3,000
2,000
2,000
Total equity and liabilties 100,000 66,000

Non-current assets
35,000
40,000
45,000
Cancelling intra-group items
Current assets
Inventories
others
Cash at bank
16,000
2,000
6,000
1,000
12,000
9,000
Total assets 100,000 66,000
Equity
$1 ordinary shares
Retained earnings
Current liabilities
Bank overdraft
Payables: Parent Co
Payables: Other
70,000
16,000
14,000
40,000
19,000
3,000
2,000
2,000
Total equity and liabilties 100,000 66,000

Non-current assets
35,000
40,000
45,000 80,000
Adding up 
Current assets
Inventories
others
Cash at bank
16,000
2,000
6,000
1,000
12,000
9,000
28,000
15,000
1,000
Total assets 100,000 66,000 124,000
Equity
$1 ordinary shares
Retained earnings
Current liabilities
Bank overdraft
Payables: Parent Co
Payables: Other
70,000
16,000
14,000
40,000
19,000
3,000
2,000
2,000
70,000
35,000
3,000
16,000
After cancelling intra-group item
Total equity and liabilties 100,000 66,000 124,000

Non-current assets
35,000
40,000
45,000 80,000
Adding up 
Current assets
Inventories
others
Cash at bank
16,000
2,000
6,000
1,000
12,000
9,000
28,000
15,000
1,000
Total assets 100,000 66,000 124,000
Equity
$1 ordinary shares
Retained earnings
Current liabilities
Bank overdraft
Payables: Parent Co
Payables: Other
70,000
16,000
14,000
40,000
19,000
3,000
2,000
2,000
70,000
35,000
3,000
16,000
After cancelling intra-group item
Total equity and liabilties 100,000 66,000 124,000
Cash at bank at parent co and
bank overdraft at subsidiary
cannot be netted off as they
both are falling into assets vs.
liability category (for the
group), which cannot be
netted/cancelled off.
The share capital of a
subsidiary co must always be a
wholly cancelling item.

Part cancellation
An item may appear in the statements of financial position of a
parent company and its subsidiary, but not at the same amounts.
(a) The parent company may have acquired shares in the subsidiary
at a price greater or less than their face (or 'par') value.
(b) The asset will appear in the parent company's accounts at cost,
while the equity will appear in the subsidiary's accounts at par
value. {What is the impact?}
(c) Even if the parent company acquired shares at par value, it may
not have acquired all the shares of the subsidiary (so the subsidiary
may be only partly owned). {What is the issue it raises?}

Part cancellation
An item may appear in the statements of financial position of a
parent company and its subsidiary, but not at the same amounts.
(a) The parent company may have acquired shares in the subsidiary
at a price greater or less than their face (or 'par') value.
(b) The asset will appear in the parent company's accounts at cost,
while the equity will appear in the subsidiary's accounts at par
value. {This raises the issue of goodwill}
(c) Even if the parent company acquired shares at par value, it may
not have acquired all the shares of the subsidiary (so the subsidiary
may be only partly owned). {This raises the issue of non-controlling interests}

Goodwill arising on consolidation
Goodwill arising on consolidation is recognised as
an intangible asset in the consolidated statement of
financial position (IFRS 3, para. 32)
Students must be thorough in
calculation of Goodwill !

Situations causing goodwill arising on consolition
o When the cost of shares not = to its par value
o Goodwill arising on pre-acquisition profits of
subsidiaries
o Difference between fair value and carrying value
of the net assets of the subsidiaries
o Difference of consideration value transferred and
net acquisition-date fair value

Example: Goodwill arising when the cost of shares not = par value
P Co purchased all of the share capital (40,000 $1 shares) of S Co for $60,000 in
cash. The statements of financial position of P Co and S Co prior to the acquisition
are as follows.
STATEMENTS OF FINANCIAL POSITION AS AT 31.12.X1 P Co S Co
Non-current assets '000 '000
Property, plant and equipment 100 40
Cash at bank 60
Total assets 160 40
Equity and liabilities
Share capital 160 40
Total equity and liabilities 160 40

Example: Goodwill arising when the cost of shares not = par value
P Co purchased all of the share capital (40,000 $1 shares) of S Co for $60,000 in cash. The statements of
financial position of P Co and S Co prior to the acquisition are as follows.
STATEMENTS OF FINANCIAL POSITION Consolidation
AS AT 31.12.X1 P Co S Co Group
Non-current assets '000 '000 '000
Property,plant&equip 100 40 140
Goodwill (on consolidation) 20
Cash at bank 60
Total assets 160 40 160
Equity and liabilities
Share capital 160 40 160
Total equity and liab. 160 40 160
1. Cash at bank used for
acquisition of S Co.
1. Property, plan &
equipment worth 40,000
+ intangible asset
(goodwill consideration)
20,000 = 60,000.

Example: Goodwill arising due to pre-acquisition profits of subsidiary
In case of S Co was purchased sometime after incorporation and had earned profits of
$8,000 in the period before acquisition, its statement of financial position just before the
purchase would look as follows.
Total assets 48,000
Share capital 40,000
Retained earnings 8,000
Total equity and liabilities 48,000
For example, if P Co now purchases all the
shares in S Co it will acquire total assets
worth $48,000 at a cost of $60,000. Clearly
in this case S Co's intangible assets
(goodwill) are being valued at $12,000.
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.

Example: Goodwill and pre-acquisition profits
P Co acquired the ordinary shares of S Co on 31-3-2021, when the draft
statements of financial position of each company were as follows:
Financial positions of S Co
Financial positions of P Co
IFRS 3

Example: Goodwill and pre-acquisition profits
P Co acquired the ordinary shares of S Co on 31-3-2021, when the draft
statements of financial position of each company were as follows:
Financial positions of S Co
Financial positions of P Co

To be continued in next class! – Thanks for your attendance!
In the next part of this lecture, we will continue 
• Continue with doubts clarification, if any, needed by our students in this
lecture
• Fair value of net assets at acquisition
• Types of consideration transferred
• Non-controlling interests & Intra-group trading
• Intra-group trading
And then move on to the next lecture of ‘consolidation of results statements’.
Advocate NSM Shahul Hameed, Head of OLI Academy & Training Institute,
Madukkur-614903. My WhatsApp Number 91-8675353989

To be continued in next class! – Thanks for your attendance!
Praise be to God!
Thank You.

NSMSH Lecture ACCA F3 FA Consolidation of Financial Statementsdated financial statements.pptx

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