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Consolidation (Assistant Note)

Basic guide to group accounts

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klrohan26
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27 views5 pages

Consolidation (Assistant Note)

Basic guide to group accounts

Uploaded by

klrohan26
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Cosolidation (IFRS-10)

Ownership
a) More than 50% Control Subsidiary Consolidate Financial st.
b) 20% - 50% Significant influence Associates Equity accounting
c) Less than 20% Financial Asset

Important points:
1. If Parent company owns only 48% of subsidiary company but has more than half members
ins BOD then the financial statements should be consolidated.
2. If Parent company owns 19% but has one or more than one member in BOD then equity
accounting should be followed

Control and Power:


The power to govern financial and operating policy of an entity so as to obtain benefit from
its activities is called control.
Power is a existing right that keep ability to direct relevant activities. Relevant activities are
the activities that significantly affects investee return, such as selling and purchasing of goods
or services, managing financial assets and other assets etc.
Power can be obtained by following ways:
a) Direct Power:
It can be obtained by straight forward power that is having majority of voting rights or
having more than 50% shareholders.
b) Indirect Power:
Power can also be obtained by other than having majority of voting rights. Such as:
1. Right to appoint, reassign or remove key management personnel who can direct the
relevant activities.
2. Right to appoint or remove person or entity that direct relevant activities.
3. Right to direct the investee or to veto changes of transaction of investee to the benefit
of investor.
4. Other right those specified in management contract.
5. If company obtain control, they should make consolidation.

Exemption from consolidation:


a) If its debt or equity instrument are not traded in public market (not listing) or not in a
process of filing its financial statement to securities commission or other regulatory
organization for purpose of issuing any class of instrument in public market.
b) If it is a partially own subsidiary (intermediate parent)

70% 70%
A B C

Intermediate Parent

c) If parent entity meets the criteria of investing entity.

Key Points While Preparing Consolidation


a) For the purpose of consolidation, all group members must have same accounting policy.
b) For the purpose of consolidation, group must exclude intragroup transaction as their
inclusion could inflate the data.
Eg:
A B 60%

If A sells gods to B worth $10,000 then, in consolidation:


Dr. Sales – 10,000
Cr. Purchase – 10,000

c) For the purpose of consolidation, unrealized profit should be eliminated since there
inclusion could inflate profit.
d) For the purpose of consolidation, intra group receivables or payables or loan or
investment or similar items should be excluded because it could inflate particular data.
Eg: Contra entry should be made in case of group receivables and payables.

Process of preparation of consolidated statement of financial Position

Step 1: Group Structure

%=?
A B
- If % not given in question then it is calculated as:
No. of share purchased/total no. of shares in subsidiary
- Date of Purchase/Acquisition

# It is better to show purchase consideration in step 1


Step 2: Net asset calculation of subsidiary
Net Asset @ Acquisition Net Asset @ Reporting
Share Capital xx xx
Share Premium xx xx
Retained Earning xx xx
Revaluation Surplus xx xx
Fair value adjustment xx xx
Fair value depreciation adj (x)
Total xxx xxx

Step 3: Goodwill Calculation


Purchase Consideration xx Net asset/Partial method
Less: Net asset @ acquisition * P/S% (xx) of goodwill calculation
Parent Goodwill (A) xx
Fair Value of NCI xx
Less: Net asset @ acquisition* S/S% (x)
NCI Goodwill (B) xxx
Total Goodwill (A+B) xxx

Shortest Way to Calculate Goodwill


Goodwill = Purchase Consideration + Fair value of NCI – Net Asset @ Acquisition of subsidiary

Purchase Consideration:
It can be calculated in four ways:
a) Cash consideration
b) Share exchange
c) Differed consideration
d) Contingent consideration

a) Cash Consideration
Dr. Investment in Subsidiary
Cr. Cash
b) Share Exchange
A company purchase 600 no. of shares of B company out of 1000 no. of shares by providing 4
shares for every two shares. Market value of a share at purchase date was $6 and the face value
was 50 cents.
Market value of B share at the date of acquisition was $10 and nominal value was $1.
Required: a) Amount of investment in subsidiary
b) Journal Entry
Soln

# If purchase consideration is not given in information then it should be extracted from balance
sheet.

Fair Value of NCI


If fair value of NCI is not given in question then it is calculated as:
Fair value of NCI = subsidiaries remaining share * market value per share of subsidiary

Step 4: Calculation of NCI

Fair Value of NCI xx


Post-Acquisition Profit of subsidiary* S/S% xx
(N.A. @ Rep – N.A. @ Acq) * S/S%
Non-Controlling Interest (NCI) xxx

Step 5: Group Retained Earning

Parent R/E @ Reporting xx


Post-Acquisition Profit of subs. * P/S% xx
Adjustments x/(x)
Group Retained Earning xxx

Note: If there is 100% acquisition,


a) We don't need to calculate NCI
b) Fair value of NCI is always zero
c) Goodwill under partial and full method are same.
Adjustment to Unrealised Profit

P Parent sells to subsidiary S


a) Adjustment to the consolidated statement of financial position.
Dr. Group R/E (W-5)
Cr. Closing Inventory

b) Adjustment to the consolidated statement of profit and loss and other comprehensive
income.
i) Dr. Sales (selling price)
Cr. Cogs (Selling price)
ii) Dr. Cogs (URP)
Cr. Inventory (URP)

Subsidiary sells to parent


S P
a) Adjustment to the consolidated statement of financial position.
Dr. subs R/E (W-2)
Cr. Closing inventory

b) Adjustment to the consolidated statement of profit and loss and other comprehensive
income.
i) Dr. Sales (selling price)
Cr. Cogs (Selling price)
ii) Dr. Cogs (URP)
Cr. Inventory (URP)

Mid-Year Acqusition (subsidiary)


Retained Earning @ Reporting = Retained Earning @ Acquisition + Post acquisition profit

Consolidated Statement of PNL and Associates


Profit attribution:
NCI share of profit = (Sub's profit for the year – URP)*S/S%
Parent share of profit = consolidated profit for the year – NCI share of profit
Note: We reduce NCI share of PURP from NCI share of profit only when subsidiary is the seller

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