Chapter 14 - Group accounts: Consolidated SOPL Flashcards
What is a consolidated Statement of Profit or Loss (SOPL)?
A Consolidated Statement of Profit or Loss (SOPL) is a financial statement that presents the combined financial performance 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.
- Combines the revenues, expenses, and profits of the entire group.
- Eliminates intra-group transactions, such as sales or interest income between group companies.
- Reflects the group’s total profit or loss for the reporting period.
- Non-controlling interest (NCI) is shown separately, representing the share of profit or loss attributable to shareholders of subsidiaries not owned by the parent.
Outline the standard pro forma workings used to prepare a consolidated Statement of Profit or Loss (SOPL)
What are the adjustments that may need to be made to the parent or subsidiary accounts before they can be consolidated in a SOPL?
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 Trading
- What: Remove sales, purchases, management fees, interest, or other income/expenses between group companies.
- Why: These transactions are internal and do not reflect income or expenses from external parties.
2. Elimination of Unrealised Intra-Group Profits
- What: If one group company sells goods to another and they remain unsold at year-end, eliminate the profit included in closing inventory.
- Why: The profit is not realised from the group’s perspective until the goods are sold to an external customer.
3. Adjustments for Intra-Group Asset Transfers (Affecting Profit)
- What: Eliminate any gains or losses from the sale of assets (e.g. PPE) between group companies.
- Why: These profits or losses are not realised externally and must be removed to avoid misstating group profit.
4. Elimination of Dividends Paid Within the Group
- What: Eliminate dividends declared by subsidiaries to the parent.
- Why: These are internal distributions of profit and not income from outside the group.
5. Goodwill Impairment
* What: Recognise any impairment loss on goodwill arising from the acquisition of a subsidiary.
* Why: Impairment reduces the carrying value of goodwill and must be recorded as an expense in the consolidated SOPL.
Other common pre-consolidation checks:
- Ensure both entities use the same accounting policies.
- Align reporting periods (e.g. year-end dates) if needed.
What are adjustments for intra-group trading with regards to consolidated accounts and why are they required?
Intra-group trading refers to transactions between group entities — such as sales, purchases, or the provision of services — that occur within the group, not with external parties.
Because from the group’s perspective, these internal transactions do not represent real income or expenses. The group is considered a single economic entity, so they have to be eliminated to avoid overstating revenue, cost of sales, and profit in the consolidated financial statements.
Outline the method for adjusting for intra group trading when preparing consolidated SOPLs
Step 1: Identify All Intra-Group Transactions
* Review the income statements of all group companies for:
* Intra-group sales and purchases
* Management or service fees
* Interest income and expense on intercompany loans
* Royalties or license fees
Step 2: Match Counterparty Entries
* Compare income and expense entries between entities to ensure they match.
* Investigate any differences, which may be due to:
* Timing issues (e.g. invoice issued by one entity but not yet recorded by the other)
* Different treatment of VAT or discounts
* Currency translation if entities operate in different currencies
Step 3: Adjust for Timing Differences
* Make journal entries to align the timing of income and expense recognition:
* Accrue unrecorded income/expenseswhere needed
Defer revenue/expense if recognition was premature
Step 4: Eliminate Intra-Group Income and Expenses
* Once amounts match, eliminate them in the consolidated SOPL:
* Cancel intra-group sales against cost of sales
* Cancel intra-group interest income against interest expense
* Cancel service fees, management charges, and other internal income/expenses
Step 5: Review
* Ensure no intra-group income or expenses remain in the consolidated SOPL.
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
Outline the method for adjusting for unrealised intra-group profits where parent sells to subsidiary when preparing consolidated SOPLs
Step 1: Identify Intra-Group Sales of Inventory or Assets
* Review the parent’s revenue and the subsidiary’s purchases for:
* Sales of inventory that are still held by the subsidiary at year-end
* Transfers of non-current assets (e.g. PPE)
* Focus only on transactions where profit has not yet been realised outside the group.
Step 2: Calculate Unrealised Profit
* Determine the portion of inventory or asset still held by the subsidiary at the reporting date.
* Calculate the profit margin included in the unsold inventory or un-depreciated portion of the asset:
* Inventory:
Unrealised profit = Inventory held × markup or margin
* Non-current assets:
Unrealised profit = (Transfer price – carrying amount) × un-depreciated portion
Step 3: Adjust Consolidated SOPL
* Reduce group profit by eliminating the unrealised profit:
* Inventory: Decrease consolidated cost of sales
* Assets: Reduce consolidated depreciation expense if overstated
* The adjustment is made against the parent’s retained earnings, since the parent recorded the profit.
Step 5: Consider NCI Impact
* No impact on NCI in downstream transactions (parent to subsidiary), because the profit was recognised by the parent.
* The full adjustment affects the parent’s share of profit.
Step 6: Review
* Ensure all unrealised profits from intra-group sales by the parent are:
* Eliminated from group profit
Outline the method for adjusting for unrealised intra-group profits where subsidiary sells to parent when preparing consolidated SOPLs
Step 1: Identify Intra-Group Sales of Inventory or Assets
* Review the subsidiary’s revenue and the parent’s purchases for:
* Sales of inventory that are still held by the parent at year-end
* Transfers of non-current assets (e.g. PPE)
* Focus on transactions where profit has not been realised outside the group.
Step 2: Calculate Unrealised Profit
* Determine the portion of inventory or asset still held by the parent at the reporting date.
* Calculate the profit margin included in the unsold inventory or un-depreciated portion of the asset:
* Inventory:
Unrealised profit = Inventory held × markup or margin
* Non-current assets:
Unrealised profit = (Transfer price – carrying amount) × un-depreciated portion
Step 3: Adjust Consolidated SOPL
* Reduce group profit by eliminating the unrealised profit:
* Inventory: Decrease consolidated cost of sales
* Assets: Adjust depreciation expense if overstated
* The adjustment reduces the subsidiary’s profit, which affects the profit attributable to both the parent and NCI.
Step 5: Consider NCI Impact
* Because the subsidiary made the sale, part of the unrealised profit belongs to the non-controlling interest (NCI).
* The reduction in group profit is allocated between the parent and NCI based on the ownership percentage.
Step 6: Review
* Ensure all unrealised profits from intra-group sales by the subsidiary are:
* Removed from group profit
* Reflected in the inventory or asset balances
* The NCI’s share of profit is correctly adjusted in the consolidated SOPL
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 selling company may recognise a profit or loss, and the purchasing company records the asset at the transfer price and depreciates it based on that amount.
In the consolidated Statement of Profit or Loss, any profit or loss on the transfer must be eliminated, as it is not realised outside the group. Depreciation must also be adjusted to reflect the asset’s original carrying amount to the group, not the inflated transfer price.
Outline the method for adjusting for intra-group non-current asset transfers where parent sells to subsidiary when preparing consolidated SOPLs
Step 1: Identify Intra-Group Asset Transfers
* Review the parent’s disposal records and the subsidiary’s acquisitions for:
* Transfers of non-current assets (e.g. PPE) between group entities
* Focus on transfers where the selling price differs from the carrying amount.
Step 2: Calculate Unrealised Profit
* Determine the difference between the transfer price and the asset’s carrying amount in the parent’s books.
* Unrealised profit = Transfer price – Carrying amount
* This profit is internal and must be eliminated in consolidation.
Step 3: Adjust Consolidated SOPL
* Eliminate the unrealised profit recorded by the parent.
* Adjust depreciation expense to reflect the asset’s original cost to the group:
* Excess depreciation = (Transfer price – Carrying amount) ÷ remaining useful life
* Reduce consolidated depreciation expense by this amount
* The adjustment affects only the parent’s share of profit.
Step 4: Consider NCI Impact
* Since the parent earned the unrealised profit, the adjustment does not affect the non-controlling interest (NCI).
* The full adjustment reduces the parent’s profit in the consolidated SOPL.
Step 5: Review
* Ensure that:
* The intra-group gain is removed from group profit
* Depreciation is adjusted based on the asset’s original carrying value
Outline the method for adjusting for intra-group non-current asset transfers where subsidiary sells to parent when preparing consolidated SOPLs
Step 1: Identify Intra-Group Asset Transfers
* Review the subsidiary’s disposal records and the parent’s acquisitions for:
* Transfers of non-current assets (e.g. PPE) between group entities
* Focus on transfers where the selling price differs from the carrying amount.
Step 2: Calculate Unrealised Profit
* Determine the difference between the transfer price and the asset’s carrying amount in the subsidiary’s books.
* Unrealised profit = Transfer price – Carrying amount
* This profit is not realised externally and must be eliminated.
Step 3: Adjust Consolidated SOPL
* Eliminate the unrealised profit recorded by the subsidiary.
* Adjust depreciation expense to reflect the asset’s original cost to the group:
* Excess depreciation = (Transfer price – Carrying amount) ÷ remaining useful life
* Reduce consolidated depreciation expense by this amount
* The adjustment reduces the subsidiary’s profit.
Step 4: Consider NCI Impact
* Because the subsidiary made the sale, the adjustment affects both the parent’s and the non-controlling interest’s (NCI) share of profit.
* The reduction in group profit is allocated between parent and NCI based on the group’s ownership percentage.
Step 5: Review
* Ensure that:
* The intra-group gain is removed from group profit
* Depreciation is adjusted to reflect group cost
* The NCI’s share of profit is correctly adjusted in the consolidated SOPL
What are adjustments for intra-group dividends with regards to consolidated accounts and why are they required?
Intra-group dividends are dividends paid by a subsidiary to the parent.
They must be eliminated in the consolidated Statement of Profit or Loss because they are internal transactions and do not represent income from outside the group.
The parent’s dividend income and the subsidiary’s dividend payment are removed to avoid overstating group profit.
Outline the method for an adjustment for intra-group dividends when preparing consolidated SOPLs
Step 1: Identify Intra-Group Dividends
* Review the parent’s income statement and the subsidiary’s equity for:
* Dividend income recorded by the parent
* Dividends declared or paid by the subsidiary to the parent
* Focus on dividends exchanged between group entities.
Step 2: Match Dividend Amounts
* Confirm the dividend income in the parent matches the dividend declared by the subsidiary.
* Investigate any differences due to:
* Timing (e.g. declared but not yet received)
* Interim vs final dividends
Step 3: Eliminate Dividend Income
* Remove the dividend income recorded by the parent from the consolidated SOPL.
* This prevents overstatement of group income from internal transactions.
Step 4: Consider NCI Impact
* If the parent owns less than 100% of the subsidiary:
* Only eliminate the parent’s share of the dividend.
* Any dividends paid to non-controlling interest (NCI) are not eliminated and remain in group equity.
Step 5: Review
* Ensure that:
* All intra-group dividend income is removed from group profit
* Only dividends from external sources appear in the consolidated SOPL
* The adjustment does not affect overall consolidated profit
What are adjustments for Goodwill impairment with regards to consolidated accounts and why are they required?
Goodwill impairment occurs when the carrying amount of goodwill exceeds its recoverable amount.
In the consolidated Statement of Profit or Loss, any impairment loss must be recognised as an expense.
This adjustment is required to ensure goodwill is not overstated and the consolidated financial statements reflect the group’s true economic value.
Outline the method for an adjustment for Goodwill impairment where goodwill was calculated using the proportionate method when preparing consolidated SOPLs
Step 1: Calculate/Identify Impairment Loss
* Impairment loss = Carrying amount – Recoverable amount
* Apply the full impairment loss to goodwill, up to the value of goodwill held by the group.
Step 2: Adjust Consolidated SOPL
* Recognise the impairment loss as an expense in the consolidated Statement of Profit or Loss.
* This reduces the parent’s share of profit only, as the NCI does not share in goodwill calculated under the proportionate method.
Step 3: Consider NCI Impact
* Because goodwill was calculated using the proportionate method, the impairment does not affect NCI.
* The entire loss is charged to the parent’s profit.
Step 4: Review
* Confirm the impairment loss is correctly reflected in the consolidated SOPL.
Outline the method for an adjustment for Goodwill impairment where goodwill was calculated using the full fair value method when preparing consolidated SOPLs
Step 1: Calculate/Identify Impairment Loss
* Impairment loss = Carrying amount – Recoverable amount
* Apply the full impairment loss to goodwill, up to the value of goodwill recognised in the consolidated accounts (including the NCI portion).
Step 2: Adjust Consolidated SOPL
* Recognise the impairment loss as an expense in the the relevant subsidiary thus reducing its profit for the period.
* This reduces the consolidated group profit.
Step 3: Consider NCI Impact
* Because goodwill was calculated using the full fair value method, the impairment loss is shared between the parent and NCI.
* Allocate the loss based on the ownership percentages.
Step 4: Review
* Confirm the impairment loss is fully reflected in the consolidated SOPL.
* Ensure NCI’s equity is adjusted accordingly.
If a subsidiary is acquired mid-year, what affect will this have when preparing consolidated SOPLs?
If the subsidiary is acquired during the accounting period, the entire statement of profit or loss of the subsidiary is split between pre-acquisition and post-acquisition proportions. Only the post-acquisition figures are included in the consolidated statement of profit or loss.
Assume revenue and expenses accrue evenly over the year unless the contrary is indicated – therefore time-apportion results of the subsidiary from the date of acquisition.
Time-apportion totals for revenue, cost of sales, expenses and tax first, then deduct post-acquisition intra-group items
Outline the method for calculating retained earnings for mid-year acquisitions when preparing consolidated SOPLs
Step 1: Set Up the Consolidation Schedule Working:
Step 2: Fill in the Parent Column as Normal:
Step 3: Fill in the Subsidiary Column Time Apportioned:
* Calculate the time apportioned income and expenses and fill these into the subsidiary column - take the fiigure from the subsidiaries SOPL and multiply if by the time-apportion factor (i.e. if acquired in May, 5/12).
Step 4: Make Adjustments for Intra-Group Items:
* Make adjustments for intra-group items as per normal
Outline the proforma and method for putting together a consolidated statement of profit or loss
METHOD
CONSOLIDATED SOCIE
DISPOSALS
