Chapter 5 Group accounts: consolidated statement of financial position Flashcards
1.1 Consolidated statement of financial position
Basic principles are to include 100% of the assets and liabilities of the parent and subsidiary (equals control) and include the share of net assets owned by non-controlling interest (equals ownership).
2.1 Intra-group adjustments – acquisitions part way through the reporting period
You may not be given the subsidiary’s reserves at acquisition. You need to pro-rate the subsidiaries profit for the year and either add it to the opening reserves or subtract is from the year-end reserves.
2.2 Intra-group transactions
Group statements present the group as a single entity. The effect of group member transactions needs to be eliminated.
Intra-group loans: group companies can provide loans or finance to one another. We cancel the receivable in one company with the payable in the other. Loans, debentures, and redeemable preference shares attract interest. This may result in a finance cost in one group member and finance income in another. If interest remains unpaid at year end, this needs to be removed.
Intra-group trading (intra-group current accounts): if group companies trade with each other this is probably done on credit leading to a receivables account in one company’s and a payables account in the other. For consolidation purposes this causes two problems: these are amounts owing within the group rather than outside the group and therefore they must not appear in the consolidated statement of financial position (as per intra-group loan) and the two balances may not agree due to cash in transit or goods in transit.
2.3 Cash/goods in transit
At the yearend, current accounts may not agree, owing to the existence of in-transit items such as cash. Usual rules are to make the consolidation adjustment to the statement of financial position of the recipient. The cash in transit adjusting entry is Dr Cash in transit and Cr Receivables current account. The goods in transit adjusting entry is Dr Inventory and Cr Payables current account. This adjustment is just for consolidation. Once in agreement the receivable and payable should be cancelled as for intra-group loans.
2.4 Unrealised profits
Profits made by members of a group on transitions with other group members are recognised in the entity accounts but for group accounts the profits are unrealised and must be eliminated from the accounts as a consolidation adjustment. Therefore, when one company sells to a group member, the adjustments needed are cancelling current accounts, deal with any unrealised profit if goods are still held by a group company at the year end and write down inventory value to cost rather than the amount it was sold between group companies.
- Step 1: calculate the profit included in closing inventory. Determine value of closing inventory in entity accounts which has been purchased from another company in the group. Use mark-up or gross profit percentage to calculate how much of that value represents profit earned by the selling company
- Step 2: remove the profit element. This is included in parent company’s accounts and relates entirely to the group. Dr Group retained earnings and Cr Group Inventory. Then remove the profit element in the subsidiary’s accounts and relates partly to the group, partly to NCIs by Dr Subsidiary retained earnings and Cr Group inventory.
2.5 Intra-group transfers of non-current assets
If one group company sells non-current assets to another, adjustments are made to recreate the situation that would have existed if the sale had not occurred: there would have been no profit on sale and depreciation would have been based on original cost of the asset. To calculate the unrealised profit adjustment, compare:
- CA of NCA at year end after transfer X
- CA of NCA at year end if transfer had not taken place (X)
- Non-current asset PURP X
The consolidation adjustment is Dr RE of seller and Cr NCA on CSFP
3.1 The goodwill calculation – fair value of consideration
The fair value of an asset and a liability is defined in IFRS 13 to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The cost of acquisition includes the cash, but other types of consideration at fair value:
- Cash consideration: Dr Cost of Investment (amount included in consideration in calculation of goodwill) and Cr Cash
- Deferred cash consideration: Dr Cost of investment and Cr liabilities (included at its present value) and then discounting of this liability will be unwound each year Dr Finance cost and Cr Liabilities
- Share consideration: the parent mat issue its own shares in exchange for the shares of the subsidiary. Dr Cost of investment (market value at acquisition date), Cr Share capital and Cr Share premium
- Deferred share consideration: Dr Cost of investment and Cr Shares to be issued
- Contingent consideration: amount payable at a future date dependent upon certain events. Contingent cash is Dr Cost of investment and Cr provision. Contingent shares is Dr Cost of investment and Cr shares to be issued.
- Acquisition costs: professional fees incurred directly in the acquisition must be recognised as expenses in the period they incurred. Share issue costs are debited to the share premium account.
3.2 Changes in fair value of contingent consideration
The fair value at acquisition could be different to the actual consideration paid. Any differences are treated as a charge in accounting estimate and adjusted in accordance with IAS 8. The only time a change will be treated retrospectively with an adjustment to goodwill would be if the change related to conditions that existed at the acquisition date and occurred within one year of the date of acquisition. if the contingent consideration is in charges, then it should not be remeasured, but its subsequent settlement should instead be recognised as part of equity.
4.1 NCI valuation methods
IFRS 3 allows a choice of how to measure NCI. The proportionate (share of NA) method and the fair value (full goodwill) method are used. The choice is made on an acquisition by acquisition basis and impacts the goodwill and NCI calculation.
The proportionate method is calculating NCI as NCI% x NAs at acquisition. The fair value method is calculated as follows:
- FV of NCI at acquisition date X
- NCI% of post-acquisition movement in net assets X
- Less: NCI% of goodwill impairment (X)
- NCI X
5.1 Fair value of assets and liabilities
IFRS 3 requires that the acquirer should recognise the assets, liabilities, and contingent liabilities of the acquiree at fair value at the date of acquisition. To process a fair value adjustment in consolidation we consider the impact at the acquisition and reporting date:
- At acquisition put an adjustment into the net assets working to bring the net assets to fair value (this will then impact the goodwill)
- At reporting date account for the adjustment on the face of the CSFP and in the net assets working (this will impact the NCI working).
5.2 Fair value adjustments on consolidation – PPE
Upon consolidation , all PPE in subsidiaries books should be consolidated as its fair value. Any difference between the carrying value in the book and the fair value is treated as fair value uplift which is shown on the face of the statement of financial position and depreciation should be charged on all fair value adjustments from the point of acquisition.
5.3 Goodwill in subsidiaries books
Any goodwill should not appear on the consolidated statement of financial position as it is not identifiable. It must be removed from net assets.
5.4 Intangibles not recognised in subsidiary
There may be intangibles not recognised on the statement of financial position as they do not meet IAS 38 criteria. Upon consolidation, the FV of all identifiable assets should be recognised on the CSFP.
5.5 contingent liabilities disclosed in subsidiaries books
In subsidiaries individual accounts they may disclose contingent liabilities. Contingent liabilities existing at acquisition should be included on the face of the CSFP.
5.6 Adjustments to provisional FVs of the subsidiaries net assets
Ideally the FV of net assets will be ascertained by the first year end after the acquisition, not always the case. IFRS 3 allows the use of provisional fair values. Any adjustments will be dealt with differently depending on whether they are made in the measurement period or not. If they are made in the measurement period (less than 12 months from acquisition date) an adjustment is made retrospectively and goodwill if recalculated. If outside they are treated as a change in accounting estimate and adjusted for prospectively and an impairment review is performed.
