Chapter 15: Group Accounts- consolidated statements of financial performance

Question 1

What is the form of the CSPL?

Answer 1

• From revenue to profit for the year (PFY) include 100% of parent’s figures and 100% of subsidiary’s figures = control
• After profit for the year deduct share of profits due to non-controlling interest = ownership
• Make adjustments for intra-group items such as sales of goods and dividends

Question 2

How do you calculate ownership?

Answer 2

No of shares held (held by parent) / no of ordinary shares (subsidiary issued)

Be aware of nominal value
Pro-rated for no of months owned in the year

Question 3

How do you approach W2? (consolidation schedule) PROFIT OR LOSS

Answer 3

• Set up a table with columns for the parent, each individual subsidiary, adjustments, and total
• Vertical: Revenue, Less: COS, Operating Expenses, Finance Cost, Tax, Investment Income
• No subtotals, only raw data
• Sum of adjustments must be 0 - (for adjustments that have no overall impact on profit)

Question 4

What is W3?

Answer 4

Non-controlling interest = NIC% of S’s PFY (W2)

Question 5

What treatment is required if there is an acquisition part way through a reporting period?

Answer 5

• The subsidiary’s results should only be consolidated from the date of acquisition, ie. the date in which control is obtained
  In practice:
• Time apportionment of the results of S in the year of acquisition. Unless indicated otherwise, assume that revenue and expenses accrue evenly.
• After time apportioning S’s results, deduct intra-group items as normal

Question 6

What is the effect of intra-group trading?

Answer 6

The effect of intra-group trading must be eliminated from the CSPL

Such trading will be included in the sales revenue of one group company and the purchases of another:

• Consolidated sales revenue= Parent’s revenue + Subsidiary’s revenue - intra-group sales
• Consolidated cost of sales = Parent’s COS + Subsidiary’s COS - intra-group purchases

Question 7

Where do you show the adjustment of intra-group trading?

Answer 7

The deduction of both intra-group transactions should be shown in the adjustments column of the consolidation schedule

Question 8

What happens if any goods sold intra-group are included in closing inventory?

Answer 8

Its value must be adjusted to the lower of cost and net realisable value to the group (as in the consolidated statement of financial position)

Question 9

What is the required adjustment for Inventory PURPs?

Answer 9

Dr Cost of Sales of the seller (unrealised profit figure)
CR Closing Inventory in consolidated statement of financial position (unrealised profit figure)

In practice, the debit entry should be shown as an increase to cost of sales in the seller’s column in the consolidation schedule (W2)

Question 10

What happens if one group company sells a non-current asset to another group company?

Answer 10

• Any profit or loss arising on the transfer must be deducted from the appropriate category within the seller’s column in the consolidation schedule (W2)
• The depreciation charge must be adjusted (again in the seller’s column of the schedule) so that depreciation is based on the cost of the asset to the group

Question 11

Where do you include the transfer of NCA?

Answer 11

In most cases, the profit on disposal and the depreciation charge are included in the same expense line in the SPL. Therefore only one adjustment is needed

Question 12

What happens if the NCA was transferred the previous year? PROFIT OR LOSS

Answer 12

Current Year: adjust the entire PURP (profit and depreciation) in the current year CSPL
Previous Year: Only the depreciation charge element is adjusted for this year. The gain/loss on transfer would have been adjusted for in the previous CSPL

Question 13

What about intra-group interest and management charges?

Answer 13

These are simply intra-group transactions and should be eliminated.

Interest or management charges payable in the SPL should be cancelled against income from the interest or management charges.

Make this adjustment in the ‘adjustments’ column of (W2). Typically you would see the income element within ‘interest income’ or ‘other income’ and the expense in operating expenses or finance costs.

Question 14

How do you treat intra-group dividends?

Answer 14

• A payment of a dividend by S to P needs to be cancelled out
• The effect of this on the CSPL is to reduce the investment income in P’s column of (W2) by the amount of the dividend paid to P
• Apportion the dividend to reflect ownership e.g:
  P owns 80% if S and S pays a dividend of 1,000 =
  P’s books (1,000 x 80% = 800) - take this away from investment income

Question 15

What to do if goodwill is impaired?

Answer 15

The double-entry is:
Dr Impairment expense (SPL)
Cr Goodwill

• If the proportionate (share of net assets) basis has been used to calculate NCI, take the impairment charge through P’s column of (W2) (usually operating expenses, unless told otherwise)
• If the fair value method has been used to calculate NCI, take the impairment charge through S’s column of (W2)

Question 16

How is a fair value adjustment treated?

Answer 16

When a FV uplift on PPE or an internally generated intangible in S is recognised on consolidation, this will give rise to FV depreciation/amortisation. The extra charge for the year will go through S’s column of (W2). This depends upon where the depreciation for the fair valued asset is usually shown

Eg., if the fair valued asset is plant and machinery, the extra depreciation adjustment would be recorded in cost of sales

Question 17

How do you calculate non-controlling interest b/f?

Answer 17

(add) NCI at acquisition
(add) NCI% x S’s post-acquisition movement in NS’s up to b/f date
(less) NCI% GW impairment b/f (FV method only)

Shortcut for proportionate method:
NCI b/f = NCI% of S’s net assets at the beginning of the year

Question 18

How do you calculate group retained earnings?

Answer 18

(add) 100% of Parent’s retained earnings b/f
(add) Parent’s% of S’s post-acq’n retained earnings b/f
(less) Parent’s goodwill impairment b/f

Question 19

What is total comprehensive income?

Answer 19

• These numbers are taken from the CSPL for the year
• Profit attributable to P’s shareholders is included in the retained earnings column
• Profit attributable to NCI is included in the NCI column

Question 20

How do dividends wok in the SOCIE

Answer 20

• When P pays a dividend this reduces group retained earnings
• When S pays a dividend the NCI will receive a share of the dividend. NCI is therefore reduced by NCI% x S’s dividend paid

Question 21

How do you account for acquisitions part way through a reporting period in the CSOCE?

Answer 21

In the NCI column:
(add) B/fwd
(add) Profit for the year
(less) Dividends paid
(add) ADDED ON ACQUISITION
-
= C/fwd

NCI at acquisition calculated under share of net assets or fair value method as directed in the question (FV just added to column)

Question 22

What are the UK GAAP differences?

Answer 22

• Annual amortisation of goodwill balances. This creates an additional expense in the P&L in addition to any impairment which may also be deemed necessary
• No fair value method for NCI = could lead to differences to NCI balances in the UK CSOCE when compared to the INT CSOCE