1. HUANG HUAI UNIVERSITY FINANCIAL ACCOUNTING 2 Lecture 2 2009/10
Consolidated Balance Sheets After the Date of Acquisition
DR. AZIZ JAAFAR

2. Last lecture: Definitions & Rules on Group accounts
Parent
Subsidiary
Group
Concept of ‘control’
Group balance sheets on the date of acquisition
Goodwill
Minority interests
Fair Value ≠ Book Value of Assets (Revaluation)

3. Consolidated balance sheets after date of acquisition
Lecture covers:
Pre- and post-acquisition profits/losses
Inter-company balances
Unrealised profit on inter-company sales
Provision for unrealised profit affecting a minority
Uniform accounting policies

4. Pre- and post-acquisition profits
Pre-acquisition profits
Made before date parent acquired control
Represent net assets at acquisition date
Dealt with through Goodwill calculation
Post-acquisition profits
Made after date of acquisition
Include in consolidated income statement

5. Example – The Bend Group
1 January 2001
Bend acquired 80% of the 10,000 £1 common shares in Stretch for £1.50 per share
Investment in Stretch cost £12,000
Retained earnings were £4,000
Fair Value of Non-current assets £600 above book value

6. Bend & Stretch balance sheets at 31 December 2001
Bend (P) Stretch (S)
ASSETS
Non-currents assets
Investment in Stretch
Net current assets
NET ASSETS
EQUITY
Common Share Capital
Retained Earnings

7. Steps:
1. Calculate Goodwill on consolidation: (Compare the cost of acquisition and the Fair Value of sub’s Net Assets). 2. Calculate Minority Interest 3. Group Assets aggregation 4. Group Capital and Reserves – include parent’s share capital and reserves AND parent’s share of post-acquisition profit.

8. The Bend Group Goodwill calculation

9. The Bend Group Minority Interest calculation

10. The Bend Group asset aggregation

11. The Bend Group Capital and reserves

12. The Bend Group balance sheets at 31 December 2001

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

14. 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 Minority interest

15. 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

16. Inter-company trading and loan balances
Reconcile balance in parent with subsidiary
Should be the same
Timing differences such as cash/stock 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

17. Inter-company Dividends payable/receivable
Dividend declared by subsidiary but not paid
Appear in subsidiary’s current liabilities as Dividend Payable
In Parent’s account – as Dividend Receivable (Current Assets)
In GROUP Balance sheet – cancelled off, i.e., the figure does not appear in the consolidated balance sheet.

18. Unrealised Profit on inter-company Sales
Sales transactions between parents and subsidiaries, specifically on the element of profit that has not been realised by the group if the goods have not been sold on to a third party before the year-end.
Example:
Big plc. buys £2000 worth of goods for resale and sells them to Small plc. for £2700, making a profit of £700. At year-end, if Small plc. still has these goods in stock, the group has not yet made any profit on these goods and the £700 is therefore said to be unrealised.
It must be removed from the group balance sheet by:
Reducing the retained earnings of Big plc. by £700;
Reducing the inventories of Small plc. by £700.

19. Example 2 – The Prose Group
1 January 2001
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 above BV

20. Example – The Prose Group
During 2001
Prose sold inventory to Verse for £3,000
This was at cost plus 25% (i.e., mark-up)
Half still in inventory at 31 December

21. Prose and Verse Balance Sheets as at 31 December 2001 – Assets Section
PROSE (P) VERSE (S)
ASSETS
Non-current Assets (including land)
Investment in Verse
Current Assets
Inventories
Verse Current Account
Bond interest receivable
Other current assets
NET ASSETS

22. Prose and Verse Balance Sheets as at 31 December 2001 – Equity & Liability Section
PROSE (P) VERSE (S)
EQUITY AND LIABILITIES
Common share capital
Additional Paid-in Capital
Preferred Shares
Retained Earnings
Non-current liabilities
Bonds
Current liabilities
Prose Current Account
Bond interest payable
Other current liabilities
NET ASSETS

23. The Prose Group – Goodwill calculation

24. The Prose Group – Inter-company adjustments

25. The Prose Group – Minority interest

26. The Prose Group – Aggregate Assets

27. The Prose Group – Equity section

28. The Prose Group – Bonds

29. The Prose Group – Asset section

30. The Prose Group – Equity and liability section

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

32. Purchased Goodwill/ Goodwill on Consolidation
Goodwill has an objective valuation when a business is sold.
Purchased goodwill is based on transaction with third party at arm’s length
Goodwill is recognised by the acquirer as an asset from the acquisition date and is initially measured as the excess of the cost of the business combination over the acquirer's share of the net fair values of the acquiree's identifiable assets, liabilities and contingent liabilities.
Purchased goodwill should be initially capitalised as assets

33. Accounting for Goodwill
A number of approaches:
Capitalisation with annual impairment (IFRS 3)
Writing off directly to reserves in the year of acquisition
Writing off directly to the income statement in the year of acquisition
Amortising the goodwill over its expected life
Permanent capitalisation: keeping the goodwill in the balance sheet unchanged (i.e., no amortisation and no impairment)
IFRS 3 prohibits the amortisation of goodwill. Instead goodwill must be tested for impairment at least annually in accordance with IAS 36 Impairment of Assets