1. Chapter 23
Preparation of Consolidated Statements of Financial Position after the Date of Acquisition

2. Objectives By the end of this chapter, the reader should be able to:
account for the post-acquisition profits of a subsidiary;
eliminate inter-company balances and deal with reconciling items;
account for unrealised profits on inter-company transactions.

3. Pre- and post-acquisition profits
Pre-acquisition profits
Made before date in which parent acquired control
Represent net assets at acquisition date
Are dealt with through goodwill calculation
Post-acquisition profits
Made after date of acquisition
Include consolidated income statement.

4. Example: Bend Group – pp.606-607 (pp.421-422)
1 January 20X1
Bend acquired 80% of the 10,000 £1 common shares in Stretch plc
Investment in Stretch cost £12,000
Retained earnings were £4,000
Fair value of the non-controlling interest at the date of acquisition was £2,950
Fair value of non-current assets was £600 above book value.

5. The Bend Group statement of financial position at 31 December
Note: Stretch’s retained earnings at 31 Dec. are $6,000. At 1 Jan. they were $4,000

6. The Bend Group goodwill calculation

7. Total goodwill calculation
Fair value of non-controlling interest at date of acquisition
2,950
20% of net assets at date of acquisition (10, , )
(2,920)
Goodwill attributable to the non-controlling interest 30
Total goodwill (£320 + £30)

8. The Bend Group non-controlling interest calculation
Non-controlling interest in goodwill
Non-controlling interest ,350

9. The Bend Group asset aggregation
350
55,950
(parent company only)
(parent company)

10. Inter-company balances
Preferred shares held by parent
Bonds held by parent
Inter-company trading and loan balances
Inter-company dividends payable/receivable.

11. Preferred shares held by parent
Preferred shares acquired on the acquisition
Represented by net assets at date of acquisition
Dealt with through goodwill
Preferred shares not acquired
Part of non-controlling interests

12. Bonds held by parent Bonds acquired on the acquisition
Represented by net assets at date of acquisition
Dealt with through goodwill
Bonds not acquired on the acquisition
Appear in balance sheet as long-term loan (Liability).

13. Inter-company trading and loan balances
Reconcile balance in parent with subsidiary
Should be the same
Timing differences such as cash in transit
Update to make balances equal
Eliminate the inter-company balances
Subsidiary as debtor in parent balance sheet; parent as creditor in subsidiary balance sheet (and vice versa).

14. Example: Prose Group – pp.610-614 (pp.425-428)
1 January 20X1
Prose acquired in Verse
80% of the 10,000 £1 common shares for £21,100
20% of preferred shares for £2,000
10% of the bonds for £900
Retained earnings were £4,000
Fair value of non-current assets was £1,000 > BV.

15. Example – the Prose Group (Continued)
During 20X1
Prose sold inventory to Verse for £3,000
This was at cost plus 25%
Half of this was still in inventory at 31 December
Group accounting policies
Increase non-current assets by 100% of excess.

16. The Prose Group – asset section
Prose Verse

17. The Prose Group – equity and liability section

18. The Prose Group – goodwill calculation

19. The Prose Group – inter-company adjustments

20. The Prose Group – non-controlling interest

21. The Prose Group – aggregate assets

22. The Prose Group – equity section

23. Uniform accounting policies
Parent and subsidiary to use uniform policies
Accounts with year ends within 3 months of each other
Subject to adjustment for significant transactions.

24. Review questions The 2006 accounts of Eybl International state:
Elimination of intra-group balances
Advances arising in the course of business between the companies included in the consolidation are eliminated.
(a) Discuss three examples of inter-company (also referred to as intra-group) accounts
(b) Explain what is meant by ‘have been eliminated’
(c) Explain what effect there could be on the reported group profit if inter-company transactions were not eliminated.

25. Review questions (Continued)
Explain why the non-controlling interest is calculated as at the year-end whilst goodwill is calculated at the date of acquisition.
Explain why pre-acquisition profits of a subsidiary are treated differently from post-acquisition profits.
Explain the effect of a provision for unrealised profit on a non-controlling interest:
(a) where the sale was made by the parent to the subsidiary and
(b) where the sale was made by the subsidiary to the parent.