LECTURE 3

PREPARATION OF
CONSOLIDATED
FINANCIAL STATEMENTS
(Part 1)

UKAF 3073 Corporate Reporting

1
 LEARNING OUTCOME
At the end of the lecture, you should know how to adjust for the
following during consolidation:
• pre- and post-acquisition reserves
• fair value adjustments to assets of subsidiary
• intra-group balances and transactions
And:
• apply the accounting treatment of goodwill and non-controlling
interest
• apply the consolidation procedures for the consolidated SOFP
2
READING
Jane Lazar (2018), Company & Group Financial
Accounting (9th Edition), Chap 10

MFRS 10 Consolidated Financial Statements

3
 PRE-ACQUISITION RESERVES

• Pre-acquisition reserves are the reserves in the

subsidiary at the date of acquisition
• Such reserves are capital profits and are treated as non-
distributable by the holding company.
• These are represented by net assets in the subsidiary as
at the date of acquisition.
• The fair values of these are dealt with in the goodwill
calculation.
4
 POST-ACQUISITION
RESERVES
• Post-acquisition reserves are profits or losses made by the
subsidiary after the date of acquisition. Increases/decreases to
various reserves are post-acquisition reserves.
• The reserves of the parent and the parent’s share of the post-
acquisition reserves of the subsidiary are combined to form the
group reserves.
• Group profits are not available for distribution. Only the parent’s
reserves are available for distribution.
• Post-acquisition reserves will not affect the value of goodwill.
5
 CONSOLIDATION PROCEDURES
FOR CONSOLIDATED
STATEMENT OF FINANCIAL
POSITION (“CSOFP”)
• Compute the consideration transferred and measure Non-controlling interest
(NCI) either at fair value or fair value of the net assets of the subsidiary
• Compute goodwill – partial or full GW
• Compute the group reserves (= HC’s reserves + share of subsidiary’s post-
acquisition reserves)
• Present NCI as equity
• The statements of financial position (SOFP) of HC and subsidiary are
combined line-by-line by adding together like items of assets and liabilities
[Example 2 ]
• Intra-group balances and transactions are eliminated
6
• Unrealised profits from intra-group transactions are eliminated in full
 Example 2
H S
SOFP as at 1 January x3 RM’000 RM’000
Ord. shares 500,000 200,000
Retained profit 100,000 150,000
• Given below are the statement of financial position of two companies
600,000H and S350,000
as at
1 January 2011.
Liabilities 20,000 20,000
620,000 370,000

Non-current assets 350,000 100,000

Current asset 270,000 270,000
620,000 370,000
• On 1 January 20x3, H acquired 100% of the issued ordinary
shares of S by issuing 200 million ordinary shares in H and a
6% loan note for RM50 million to the shareholders of S. The
market value of one equity shares of H on 1 January 20x3 was
RM 1.50 each.

• REQUIRED:
a) Calculate the consideration transferred (cost of
investment).
b) Statement of financial position of H and S immediately
after H had acquired shares.
c) Consolidated FS.
 (a) Calculate the consideration transferred (cost of investment).

The fair value of the consideration transfer will be:

RM’000

6% loan note 50,000

Shares in H – 200 million x 1.50 300,000
350,000

Dr Investment in S 350 million

Cr Ord. shares 300 million
Cr 6% Loan Notes 50 million
(b) SOFP of H and S immediately after H had acquired
shares.
H S
RM’000 RM’000
Ord. shares (500k + 300k) 800,000 200,000
Retained profit 100,000 150,000
6% Loan Note 50,000 -
Liabilities 20,000 20,000
970,000 370,000

Non-current assets 350,000 100,000

Investment in S – at cost 350,000 -
Current asset 270,000 270,000
970,000 370,000
Company S:
 There is no change in the financial position of S. However,
the shareholders have changed and now H is its sole
shareholder (since it has acquired 100% of the ordinary
shares in S)

Company H:
• It has additional asset (investment) in S at a cost of RM 350
million
• As H is the holding company, it need to prepare the
consolidated FS from the current financial year.
(c) Consolidated Financial Statement
H S Elimination CSOFP
RM RM Dr Cr RM
Ord. shares 800,000 200,000 200,000 800,000

Retained profit 100,000 150,000 150,000 100,000

6% Loan Note 50,000 50,000
Liabilities 20,000 20,000 40,000
970,000 370,000 990,000

Non-current assets 350,000 100,000 450,000

Investment in S – at 350,000 - 350,000 -
cost
Current asset 270,000 270,000 540,000

970,000 370,000 350,000 350,000 990,000

 GOODWILL OR BARGAIN PURCHASE
• FV of equity shares of subsidiary – FV of net assets acquired
= +ve [GW] or –ve [Bargain Purchase]

• Accounting Treatment
1. GW shown in the CSOFP as an intangible non-current asset at
cost less impairment [Example 3]
2. Bargain purchase is recognised as income after ensuring no
errors in the determination of FV of consideration transferred
and FV of assets and liabilities

13
 Example 3 Pg. 338
• Given below are the statements of financial position of H and S as at 1
January 20x1
H S
RM RM
Ord. shares 600,000 200,000
Retained profit 400,000 100,000
Liabilities 40,000 30,000
1,040,000 330,000
Non-current assets 400,000 170,000
Investment in S (100%) 400,000 -
Current assets 240,000 160,000
1,040,000 330,000
• H acquired all the ord. shares of S in 1 January 20x1 with a cash payment
of RM 400,000
• Required: Prepare CSOFP
• In this case, the consideration transferred RM 400,000 cannot be fully
eliminated against the acquisition date equity (S’s share capital and
acquisition date reserves)
• The difference RM 100,000 is goodwill on consolidation & will be
recognized & disclosed in CSOFP.

Debit Credit
{ At the date of acquisition} RM RM
Ord. share capital 200,000
Retained profits of S 100,000
Goodwill on consolidation 100,000
Investment in S 400,000
 CSOFP of H and its subsidiary S
H S Elimination CSOFP
RM RM Dr Cr RM
Ord. shares 600,000 200,000 200,000 600,000

Retained profit 400,000 100,000 100,000 400,000

Liabilities 40,000 30,000 70,000
1,040,000 330,000 1.070,000

Non-current assets 400,000 170,000 570,000

Investment in S – at 400,000 - 400,000 -
cost
Current asset 240,000 160,000 400,000
Goodwill on conso. - - 100,000 - 100,000
1.040,000 330,000 400,000 400,000 1.070,000
 NON-CONTROLLING INTEREST (NCI)

• Represents interest of minority shareholders in the operation

or net assets of the subsidiary

• NCI is recognised on acquisition date either:

1. Option 1 –equal to proportionate share of FV of net assets of
subsidiary; or
2. Option 2 – at FV of shares held by NCI

• Option 1 recognises the parent’s share of GW only i.e. partial

GW
• Option 2 recognises GW at full value
17
 NON-CONTROLLING INTEREST (NCI)
• Represents interest of minority shareholders in the operation or
net assets of the subsidiary
• NCI is recognised on acquisition date either:
1. Option 1 – equal to proportionate share of FV of net assets of
subsidiary; or
2. Option 2 – at FV of shares held by NCI
Option 1 (PARTIAL GOODWILL):
FV of subsidiary’s net assets
 Recognize only parent’s share of GW
NCI
Option 2 (FULL GOODWILL):
FV of shares held by NCI
 Example : NCI at FV (Full goodwill)
H S
SOFP as at 1 Jan 20x2 (imm. After H acquired S) RM RM
Ord. shares 1,100,000 840,000
Retained profit 50,000 60,000
Non-current Liabilities 70,000 100,000
• Given below are the statements of financial position
1,220,000 1,000,000
of A and B on 1 Jan 2011 immediately after A had
acquired the shares in B.
Sundry assets 420,000 1,000,000
Investment in S – 600,000 ord. shares at cost 800,000 -
1,220,000 1,000,000
• H acquired 600,000 out of 800,000 ordinary shares of S on 1
Jan 20x2 for RM 800,000 cash.
• On acquisition date (1 Jan 20x2), the FV of S’s ordinary shares
was RM 1.25 each.

• REQUIRED:
a) Calculate NCI and goodwill on consolidation. Assume
NCI is measured at FV
b) Prepare consolidation journal entries
c) Prepare CSOFP
 (a) Calculate NCI & goodwill on
consolidation
STEP RM RM
1 Consideration transferred 800,000
2 NCI (200,000 x RM 1.25) 250,000
1,050,000
3 S/holders’ funds on 1 Jan 20x2:
Ordinary shares 840,000
Retained profits 60,000 900,000
4 Goodwill on consolidation 150,000

NCI’s share of goodwill RM RM

NCI – 200,000 x RM 1.25 250,000
NCI’s share of net assets of S – RM 900,000 x 25% 225,000
NCI’s share of goodwill 25,000
 (b) Prepare consolidation journal entries
Debit Credit
RM RM
Ord. share capital of S 840,000
Retained profits of S 60,000
Goodwill on consolidation 150,000
Investment in S 800,000
NCI 250,000
( c) Prepare CSOFP
Consolidated SOFP of H and its subsidiary S as at 1 /1/20x2
RM
Goodwill on consolidation 150,000
Sundry assets 1,420,000
1,570,000
Shareholder’s funds
Ordinary shares 1,100,000
Retained profit 50,000
1,150,000
Non-controlling interest 250,000
1,400,000
Non-current liabilities 170,000
1,570,000
Preparation of Conso SOFP on SUBSEQUENT DATES

 Trading results and changes to all other reserves of

the investee after it becomes a subsidiary are called
post-acquisition reserves

 Post-acquisition reserves will not affect the

measurement of GW

 The consolidated reserves in CSOFP consists of:

 Reserves of the parent
 Parent’s share of the post-acq reserves of the sub

24
 Prepare CSOFP on subsequent dates
– Example
Given below are the statements of financial position of H and its subsidiary S
as at 31 December 20x8.
H S
RM RM
Ord. shares 500,000 250,000
Revaluation reserves 40,000 20,000
Retained profit 100,000 30,000
Liabilities 100,000 50,000
740,000 350,000

Sundry assets 490,000 350,000

Investment in S – 160,000 ord. shares at cost 250,000 -
740,000 350,000
• H acquired 160,000 of the 200,000 ordinary shares of S on 1
January 20x5 when the balance in S’s accounts were:

RM
Revaluation reserve 15,000
Retained profit 20,000

• REQUIRED: Prepare the CSOFP of H and of its subsidiary as

at 31 December 20x8. Assume:
• NCI is not measured at FV
• NCI is measured at FV where the FV of S’s shares on 1 Jan
20x5 was RM1.45 per share and on 31 Dec 20x8 was RM1.60
per share
 Solutions: NCI not at FV
Determine the proportion of share holdings by the parent and by
minority shareholders:

H NCI

Ord. shared held by: 160 k /200 k = 80% 40 k /200 k = 20%

 Revaluation Reserves Retained profit

RM’000 RM’000
Year-end balance 20 30
Pre-acquisition reserve 15 20
Post-acquisition reserve 5 10

• The analyses
H’s share of pre and post-acquisition reserves:
(80%) of:
Pre-acquisition 12 16
Post-acquisition 4 8
Total 16 24

NCI (20%):
Pre-acquisition 3 4
Post-acquisition 1 2
Total 4 6
 Goodwill: RM RM
1 Consideration transferred 250,000
2 NCI (RM285k x 20%) 57,000
307,000
3 S/holders’ funds on 1 Jan 20x5: acquisition date
Ordinary shares 250,000
Revaluation reserve 15,000
Retained profits 20,000 285,000
4 Goodwill on consolidation 22,000

NCI: RM’000 RM’000

S/holders’ funds on 1 Jan 20x5(250k+15k+20k) 285 x 20% 57

Post-acquisition reserves
Revaluation reserve 5 x 20% 1
Retained profit 10 x 20% 2
60
Group Retained profits: RM’000 RM’000
H’s retained profits on 31 Dec 20x8 100
H’s share of post-acquisition profit in S:
Retained profit on 31 Dec 20x8 30
Retained profit on 1 Jan 20x5 (20)
10 x 80% 8
108
Group revaluation reserve: RM’000 RM’000
H’s revaluation reserve on 31 Dec 20x8 40
H’s share of post-acquisition revaluation reserve in S:
Reserve on 31 Dec 20x8 20
Reserve on 1 Jan 20x5 (15)
5 x 80% 4
44
Consolidated SOFP of H and its subsidiary S as at 31 Dec 20x8
RM’000
Goodwill on consolidation 22,000
Sundry assets 840,000
862,000
Equity
Ordinary shares 500,000
Group revaluation reserve 44,000
Retained profit 108,000
652,000
Non-controlling interest 60,000
712,000
Liabilities 150,000
862,000
 Solutions: NCI at FV
Determine the proportion of share holdings by the parent and by
minority shareholders:

H NCI

Ord. shared held by: 160 k /200 k = 80% 40 k /200 k = 20%

 Revaluation Reserves Retained profit

RM’000 RM’000
Year-end balance 20 30
Pre-acquisition reserve 15 20
Post-acquisition reserve 5 10

• The analyses
H’s share of pre and post-acquisition reserves:
(80%) of:
Pre-acquisition 12 16
Post-acquisition 4 8
Total 16 24

NCI (20%):
Pre-acquisition 3 4
Post-acquisition 1 2
Total 4 6
 Goodwill: RM RM
1 Consideration transferred 250,000
2 NCI (40k x RM1.45) 58,000
308,000
3 S/holders’ funds on 1 Jan 20x5: acquisition date
Ordinary shares 250,000
Revaluation reserve 15,000
Retained profits 20,000 285,000
4 Goodwill on consolidation 23,000

NCI: RM’000 RM’000

FV on acquisition date 58

Post-acquisition reserves
Revaluation reserve 5 x 20% 1
Retained profit 10 x 20% 2
61
Group Retained profits: RM’000 RM’000
H’s retained profits on 31 Dec 20x8 100
H’s share of post-acquisition profit in S:
Retained profit on 31 Dec 20x8 30
Retained profit on 1 Jan 20x5 (20)
10 x 80% 8
108

Group revaluation reserve: RM’000 RM’000

H’s revaluation reserve on 31 Dec 20x8 40
H’s share of post-acquisition revaluation reserve in S:
Reserve on 31 Dec 20x8 20
Reserve on 1 Jan 20x5 (15)
5 x 80% 4
44
Consolidated SOFP of H and its subsidiary S as at 31 Dec 20x8
RM’000
Goodwill on consolidation 23,000
Sundry assets 840,000
863,000
Equity
Ordinary shares 500,000
Group revaluation reserve 44,000
Retained profit 108,000
652,000
Non-controlling interest 61,000
713,000
Liabilities 150,000
863,000
 IMPAIRMENT OF GOODWILL
1. Impairment loss of partial GW
• Impairment loss related to the parent’s share of GW is w/off
against the parent’s share of profit
• DR GRE xx
CR GW xx
2. Impairment loss of full GW
The impairment loss is w/off against the parent’s profit and NCI
according to the % of acquisition
• DR GRE xx
DR NCI xx
CR GW xx
37
 Example 8: impairment loss of full g/will (pg 357)

• H acquired 75% equity shares in S and the full goodwill was RM 40,000.
The parent’s share of goodwill was RM32,000 and that NCI RM8,000. At
the end of the year, the impairment loss on full goodwill was RM10,000.
• REQUIRED: Discuss accounting treatment of the impairment loss.

ANSWER: Though the parent’s share of the full goodwill was

RM32,000 which is 80% of the full goodwill, the impairment loss is
written off in proportion to the holding interest (75% and 25%).
Debit Credit
RM RM
Parent’s income (GRE) 7,500
NCI 2,500
Goodwill 10,000
 PREFERENCE SHARES (NON-
REDEEMABLE)
• Besides ordinary shares, subsidiary may also have issued preference
shares (non-voting).
• The holding co may hold part or all of the preference shares
• The holding of preference shares does not alter nor affect the
controlling interest.
• Controlling interest is determined by the number of ordinary shares
held.
• In Consolidated Financial Statement, cost of investment of PS will be
cancelled against the nominal value of PS held. Any difference
= GW or bargain purchase. Note that no residual reserves are allocated
to the PS.
39
 DEBENTURES AND
REDEEMABLE PREFERENCE
SHARE CAPITAL
• If H company has acquired any of these debt instruments, the
cost or carrying value is cancelled against their nominal
values. Any difference is GW.
• Outstanding debentures and RPS not held by the H company
are:
1. Not treated as part of NCI; and
2. Included in long-term liabilities of the group.

40
 FAIR VALUE ADJUSTMENTS AND
RECOGNITION OF UNRECOGNISED
ASSETS OF SUBSIDIARY
2 main types of adjustments in CFS:
• Adjust carrying amount to fair value if carrying amount of assets of S <
fair value;
• Recognition of assets not recognised by S e.g. internally generated
brand
Adjustments required [Example 9, pg 359]
• S adjust assets to FV > revaluation surplus/deficit, which is pre-
acquisition reserve/deficit
• If S does not reflect FV in its books, adjustments made in CFS. If assets
are depreciable assets, group depreciation should be based on FV
• For assets not recognised by S, only recognise assets in CFS, and not in
the individual FS of the S. 41
OTHER ADJUSTMNTS
RELATING TO FV CHANGE

• Post-acquisition FV changes to non-current assets are

post-acquisition gains or losses. NCI will include its
share of post-acquisition changes in FV.
• When assets are adjusted to FV, the surplus or deficit
are adjusted for deferred taxation.

42
INTER COMPANY BALANCES
AND TRANSACTIONS
• Members within the group may conduct business
between them or may borrow and lend money.
• These transactions are called intra-group trading.
Examples :
• Loans
• Receivables / payables
• Current accounts
• Bill payable/receivable
• Interest payable/receivable
• Dividends payable/receivable 43
 INTRA-GROUP BALANCES
AND TRANSACTIONS
• As the objective of consolidated statement of financial position
is to disclose the total net assets employed by the group as a
single entity, the consolidated statement of financial position
should not disclose any intra-group balances.

• The consolidated financial statements report the transactions

that have taken place with parties outside the group.

• Eliminating intra-group balances avoid double counting of

assets and liabilities of the group.

44
ITEMS IN TRANSIT
• These are cash remittances and dispatch of other assets
(e.g. inventories) by one party but which has not been
received by the other party as at the balance sheet date

• The cash remittances or the dispatch of the assets will be

treated as asset in transit

45
 FACTORING OF
RECEIVABLES

• At times the receivables due from members within the

group may be factored.
• The amount outstanding to the party outside the group is
a liability.
• The unfactored/undiscounted amount is cancelled.
• The amount factored / discounted represent liabilities
to third parties and cannot be eliminated.

46
CURRENT ACCOUNTS
 Current account are used to record the amounts due from (DR bal)
and owing to (CR bal) each other where there are numerous inter-
company transactions.

 Balances in the current accounts at the balance sheet date are

cancelled off, as these are inter-company balances.

 At times, balances in the current accounts may differ due to

cash/inventory in transit.

 The differences between the current accounts have to be adjusted for

by reconciliation procedures before cancelling the amounts.

Refer to example on page 375.

47
BILLS
RECEIVABLE/PAYABLE
• These are negotiable financial instruments (legal document)
which the holder can transfer to another party.

• If the subsidiary owed parent RM 40,000, the parent may have

a bill drawn where it states the subsidiary owes the parent RM
40,000.

• The bill can be used by the parent to pay another party e.g. by
discounting.

• Once the bill is transferred, the subsidiary does not owe the
parent on the bill discounted but owes whosoever holds the
bill. 48
BILLS
RECEIVABLE/PAYABLE
(CONT’D)
• For consolidation purposes, inter co. bills are cancelled
out in the CSOFP.

• If inter co. bills were discounted, the cancellation of the

bills is limited to the undiscounted bills only.

• The bills discounted represent liabilities to third

parties.

• REFER EXAMPLES on pages 373 to 374.

49
Example 14 (pg 375)

• Given below are the statements of financial position of H and

its 80% owned subsidiary S as at 31 December 20x8.
 H S
RM’000 RM’000
Investment ord.shares of S at cost 100 -
Non-current assets 500 200
Inventory 50 20
Receivables 30 5
Bills receivable 20 10
Loan to S 30 -
Bank 20 2
750 237

Ord. shares 600 100

Retained profit 120 55
Trade payables 20 30
Bills payable 10 25
Loan from H - 27
750 237
Additional info:
• H acquired 80,000 of the100,000 ord. shares of S on 1 Jan
20x8 when the retained profit of S was RM15,000

• Trade receivables of H include RM10,000 due from S. This

includes amount due for inventory costing RM2,500 sent by H
to S on 31 Dec 20x8 but received by S on 10 January 20x9.

• Bills payable of S of RM15,000 were drawn in favour of H. H

had discounted RM8,000 of these bills.

• S had remitted RM3,000 on account of the loan from H. H

received the remittance on 2 Jan 20x9.

• NCI is not measured at FV.

• REQUIRED: Prepare CSOFP of the group.

Solutions
i. Ordinary shares of S = H – 80% NCI – 20%

ii. Cancellation of inter-company balances:

a) Trd receivables of H of RM7,500 are cancelled against trd

payables of S. Inventory is increased by RM2,500 and trd
receivables reduced by RM2,500.
b) Bills receivable of H to the amount of RM7,000 (RM15k –
RM8k) are to be cancelled against bills receivable of S. The
contingent liability on the bills discounted of RM8,000 will
be disclosed by way of a note to FS
c) Loan to S to be adjusted for remittance in transit RM3,000.
the amount owing of RM27,000 to be cancelled against loan
from H.
 Consolidation journal entries Debit Credit
RM RM
1 Trade payables – S 7,500
Inventory 2,500
Trade receivables - H 10,000

2 Bills payable – S 7,000

Bills Receivable – H 7,000

3 Loan from H – S 27,000

Cash in transit (H) 3,000
Loan to S – H 30,000
Goodwill: RM RM
1 Consideration transferred 100,000
2 NCI (115000 x 20%) 23,000
123,000
3 S/holders’ funds on 1 Jan 20x8: acquisition date
Ordinary shares 100,000
Retained profits 15,000 115,000
4 Goodwill on consolidation 8,000

Group R.profits NCI

RM’000 RM’000 RM’000
NCI at acquisition date 23
Retained profits of S 55
Pre-acquisition (15)
Post-acquisition 40 x 80% 32
x 20% 8
Balance as per SOFP 120
152 31
 CSOFP of H and its subsidiary S as at 31 Dec 20x8
RM RM
Ord. shares 600,000
Retained profit 152,000
752,000
Non-controlling interest 31,000
Current liabilities
Trade payables 20+30-7.5 42,500
Bills payable 10+25-7 28,000 70,500
853,500
Goodwill on consolidation 8,000
Non-current assets 500+200 700,000
Current assets
Inventories 50+20+2.5 72,500
Trade receivables 30+5-10 25,000
Bills receivable 20+10-7 23,000
Bank 20+2+3 25,000 145,500
853,500