Chapter 13 - Group accounts: Consolidated SOFP Flashcards
What is a consolidated Statement of Financial Position (SOFP)?
A Consolidated Statement of Financial Position (SOFP) is a financial statement that shows the combined financial position of a parent company and its subsidiaries as if they were a single economic entity.
Key Features:
- Prepared by the parent company when it has control over one or more subsidiaries.
- Includes all assets, liabilities, and equity of the group.
- Eliminates intra-group balances and transactions, such as intercompany loans or unrealised profits.
- Recognises goodwill or a bargain purchase gain from acquisitions.
- Non-controlling interest (NCI) is shown separately within equity if the parent owns less than 100% of a subsidiary.
Outline the standard pro forma workings used to prepare a consolidated Statement of Financial Position (SOFP)
What are the adjustments that may need to be made to the parent or subsidiary accounts before they can be consolidated in a SOFP?
When preparing consolidated financial statements, certain adjustments must be made to reflect the group as a single economic entity and ensure there’s no double-counting or misstatement. Key adjustments include:
1. Elimination of Intra-Group Balances
- What: Remove any receivables, payables, loans, or current accounts between group entities.
- Why: These are internal to the group and do not represent external obligations or resources.
2. Elimination of Unrealised Intra-Group Profits
- What: Eliminate any profit made on intra-group sales of goods or assets that haven’t yet been sold outside the group (i.e. still in inventory or unsold).
- Why: Profit is not realised from the group’s perspective until sold to an external party.
3. Adjustments for Intra-Group Non-Current Asset Transfers
- What: If one group company sells a non-current asset (e.g. PPE) to another
- Why: To reflect the correct value of the asset to the group and avoid overstated profits or assets.
4. Fair Value Adjustments (at Acquisition Date)
- What: Adjust the subsidiary’s identifiable assets and liabilities to fair value at acquisition.
- Why: Required for accurate goodwill/bargain purchase calculation and proper valuation of net assets.
Other common pre-consolidation checks:
- Ensure both entities use the same accounting policies.
- Align reporting periods (e.g. year-end dates) if needed.
- Translate foreign subsidiary accounts into presentation currency, if applicable.
What are adjustments for intra-group balances with regards to consolidated accounts and why are they required?
Intra-group balances are balances between group entities — such as receivables, payables, loans, or current accounts — that arise from transactions within the group, not with external parties.
Because from the group’s perspective, these internal balances do not represent real assets or liabilities. The group is considered a single economic entity, so they have to be removed
Outline the method for adjusting for intra group balances when preparing consolidated SOFPs
Step 1: Identify All Intra-Group Balances
* Review the individual accounts of all group companies for:
* Intra-group receivables and payables
* Intra-group loans and interest
* Dividends declared but not yet paid
* Cash or goods in transit
Step 2: Investigate Discrepancies
* Compare intercompany accounts to ensure amounts match.
* If they don’t agree, investigate the reason — common causes include:
* Timing differences (e.g. one company recorded a transaction, the other hasn’t)
* Items in transit (e.g. cash sent but not received, goods shipped but not yet recorded)
Step 3: Adjust for Timing Differences
* Make adjusting entries in the books of the receiving entity.
* Common adjustments include:
* Cash in transit → record cash received
* Goods in transit → record inventory received and related liability
Step 4: Eliminate Intra-Group Balances
* Once the balances agree, eliminate them in the consolidated accounts:
* Cancel receivables against payables
* Cancel intra-group loans and accrued interest
* Eliminate unpaid intra-group dividends
Step 5: Review
* Ensure no intra-group balances remain in the consolidated SOFP.
What are adjustments for unrealised intra-group profits with regards to consolidated accounts and why are they required?
Unrealised Intra-Group Profits are profits made on sales between group entities (e.g. Parent to Subsidiary or vice versa) that have not yet been realised outside the group — usually because the goods or assets are still held by a group company at the year-end.
From the group’s perspective, no actual profit has been earned until the goods or assets are sold to an external third party so must be adjusted for
What is a PURP and why is it used in consolidated accounts?
PURP stands for Provision for Unrealised Profit.
It is an adjustment made to eliminate profit on intra-group sales when the goods or assets are still held within the group at year-end (i.e. the profit is unrealised from the group’s perspective).
Outline the method for adjusting for unrealised intra-group profits where parent sells to subsidiary when preparing consolidated SOFPs
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Step 1: Identify if goods sold by the parent to the subsidiary remain in inventory at year-end
* These profits are unrealised from the group’s perspective -
Step 2: Calculate the unrealised profit:
* Use profit margin (markup or margin) × value of unsold goods
* Example:
- Parent sells at £10,000 (cost £8,000) → £2,000 profit
- 50% inventory unsold → unrealised profit = £1,000 -
Step 3: Make the adjustment to inventory and group retained earnings:
* Dr Group Retained Earnings
* Cr Inventory -
Step 4: Since the profit originated in the parent:
* The adjustment is made only against group retained earnings
* NCI is not affected
Outline the method for adjusting for unrealised intra-group profits where subsidiary sells to parent when preparing consolidated SOFPs
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Step 1: Identify if goods sold by the subsidiary to the parent remain in inventory at year-end:
* These profits are unrealised from the group’s perspective -
Step 2: Calculate the unrealised profit:
* Use markup or margin × value of unsold goods
* Example:
- Subsidiary sells at £12,000 (cost £9,000) → £3,000 profit
- 1/3 remains unsold → unrealised profit = £1,000 -
Step 3: Make the adjustment to inventory and subsidiary’s retained earnings (in the retained earnings working):
* Dr Subsidiary Retained Earnings
* Cr Inventory -
Step 4: Since the profit originated in the subsidiary:
* The adjustment reduces post-acquisition retained earnings (in the net assets working)
* NCI is affected proportionately
What is the main difference between adjusting for unrealised intra-group profits when it is the subsidiary selling to the parent than when the parent sells to the subsidiary?
The key difference lies in where the adjustment is made and whether it affects Non-Controlling Interest (NCI):
- Parent to subsidiary → affects parent only, no NCI impact
- Subsidiary to parent → affects subsidiary, NCI is adjusted
What are adjustments for intra-group non-current asset transfers with regards to consolidated accounts and why are they required?
Intra-group non-current asset transfers occur when one group entity sells a non-current asset (e.g. property, plant, equipment) to another entity within the group.
The purchasing company will have recorded the asset at the amount paid to acquire it, and will use that amount as the basis for calculating depreciation. The consolidated statement of financial position must show assets at their cost to the group, and any depreciation charged must be based on that cost.
Outline the method for adjusting for intra-group non-current asset transfers where parent sells to subsidiary when preparing consolidated SOFPs
Step 1: Identify the Unrealised Gain
* Calculate the difference between:
– Selling price (to subsidiary)
– Carrying amount in the parent’s books
* This is the unrealised profit that must be removed
Step 2: Eliminate the Unrealised Profit
* Reverse the gain recorded by the parent:
– Dr Group Retained Earnings (parent’s retained earnings)
– Cr Non-Current Asset
* This brings the asset back to the original group carrying amount
Step 3: Adjust Depreciation
* The subsidiary will now charge depreciation based on the inflated transfer price
* Recalculate depreciation using the asset’s original cost to the group
* Eliminate excess depreciation charged by the subsidiary:
– Dr Non-Current Asset
– Cr Group Retained Earnings
Step 4: Impact on Non-Controlling Interest (NCI)
* Since the gain was recorded by the parent, the adjustment is made entirely against group retained earnings*
* NCI is not affected
Outline the method for adjusting for intra-group non-current asset transfers where subsidiary sells to parent when preparing consolidated SOFPs
Step 1: Identify the Unrealised Gain
* Calculate the difference between:
– Carrying amount of the NCA at the year end
– Carrying amount of NCA at year end if transfer had not been made
* This is the unrealised profit to eliminate
Step 2: Eliminate the Unrealised Profit
* Reverse the profit recorded by the subsidiary:
– Dr Subsidiary Retained Earnings (post-acquisition)
– Cr Non-Current Asset (in consolidated SOFP)
* This restores the asset to its original group carrying value
Step 3: Adjust Depreciation
* The parent will calculate depreciation on the higher transfer price
* Recalculate depreciation using the asset’s original cost to the group
* Eliminate excess depreciation:
– Dr Non-Current Asset
– Cr Group Retained Earnings
Step 4: Impact on Non-Controlling Interest (NCI)
* Since the gain was recorded by the subsidiary, it affects post-acquisition profits
* Therefore, NCI is adjusted for its share of the unrealised profit
What are fair value adjustments with regards to consolidated accounts and why are they required?
The identifiable assets and liabilities of a subsidiary are brought into the consolidated financial statements at their fair value therefore we must adjust the subsidiary’s identifiable assets and liabilities at the acquisition date to reflect their fair values, not just the book values shown in the subsidiary’s own records. These fair value adjustments can lead to an increase or decrease in the subsidiary’s identifiable assets and liabilities
Outline the method for a fair value adjustment where the fair value has increased when preparing consolidated SOFPs
Step 1: Identify the Asset and Determine the Fair Value Increase
* Compare the asset’s fair value at acquisition to its book value in the subsidiary’s records
* Calculate the increase in value (uplift)
Step 2: Adjust Net Assets in Consolidation
* The fair value uplift is not adjusted in the individual accounts, but is reflected only in the consolidated accounts
* Increase the net assets of the subsidiary by the uplift amount - put uplift as positive in acquisition and year end columns in Net Assets working
Step 3: Use Adjusted Net Assets in Goodwill Calculation
* Add the fair value uplift to the subsidiary’s net assets
* This will reduce the calculated amount of goodwill (or increase a bargain purchase gain)
Step 4: Record Asset/Liability at Uplifted Fairvalue:
Outline the method for a fair value adjustment where the fair value has decreased when preparing consolidated SOFPs
Step 1: Identify the Asset and Determine the Fair Value Decrease
* Compare the asset’s fair value at acquisition to its book value in the subsidiary’s records
* Calculate the decrease in value
Step 2: Adjust Net Assets in Consolidation
* The fair value decrease is not adjusted in the individual accounts, but is reflected only in the consolidated accounts
* Decrease the net assets of the subsidiary by the uplift amount - put decrease as negative in acquisition and year end columns in Net Assets working
Step 3: Use Adjusted Net Assets in Goodwill Calculation
* Deduct the fair value decrease from the subsidiary’s net assets
* This will increase the calculated amount of goodwill (or decrease a bargain purchase gain)
Step 4: Record Asset/Liability at Decreased Fairvalue:
If a subsidiary is acquired mid-year, what affect will this have when preparing consolidated SOFPs?
If the subsidiary is acquired mid-year, it is necessary to calculate reserves, including retained earnings, at the date of acquisition. It is usually assumed that a subsidiary’s profits accrue evenly over time.
However, unless otherwise stated, it should be assumed that any dividends paid by the subsidiary are out of post acquisition profits.
Outline the method for calculating retained earnings for mid-year acquisitions when preparing consolidated SOFPs
Step 1: Set Up the Net Assets Working:
Step 2: Fill in the Year End Retained Earnings:
* Put the retained earnings at year end in the Year end column
Step 3: Calcualte the Retained Earnings at Acquisition:
* Calculate the retained earnings at acquisition by taking the RE at the year end and deducting the RE at the beginning of the year and then multiplying it by the time-apportion factor for the month of acquisition (i.e. if acquired in May, 5/12). Add this to the RE at the beginning of the year to get the RE at acquisition.
Step 4: Calculate Post Acquisition Retained Earnings:
* Calculate the post acquisition retained earnings by deducting the RE at acquisition from the RE at the year end
Step 5: Calculate the Share of the Post Acquisition Retained Earnings:
* Calculate the entities share of retained earnings by multiplying the post acquisition RE by the parents controlling % in the subsidiary
Outline the proforma and method for putting together a consolidated statement of finacial position
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