1. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Part three Consolidated accounts and the multinational

2. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Structure of part three Chapter 25: Introduction to consolidated financial statements Chapter 26: IFRSs and preparation of consolidated financial statements Chapter 27: Alternative methods of preparing consolidated financial statements Chapter 28: Accounting for associates, joint ventures, special purpose entities and related party transactions Chapter 29: Foreign currency translation

3. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Chapter 25 Introduction to consolidated financial statements

4. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Contents Control in groups Need for group accounts Goodwill in group accounts Preparation of simple consolidated statements of financial position Preparation of more complex consolidated statements of financial position Preparation of consolidated statement of income

5. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Learning objectives Outline the need for consolidated financial statements Explain a business combination Consider the mechanics of preparing consolidated financial statements Prepare consolidated statements of income for combinations of more than one subsidiary Prepare consolidated statements of financial position for more than one subsidiary

6. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Different types of business combinations A new company may be formed in order to absorb one or more existing companies. The essential feature here is that the new company would physically take over the assets and liabilities of the companies absorbed and the latter would then cease to exist. A company may be taken over by another company, but in this case the company being taken over would continue to exist (and would still, of course, keep its own assets and liabilities).

7. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.1 Company A, an engineering firm, owns buildings and plant and machinery with NBV of $500 000. Company B buys these assets on 1 January 200X from A at a cost of $650 000 and leases them back to A on an operating lease. Company C, on the 1 January 200X purchases 55% of the ordinary voting shares of Company A on the open market. Which company, B or C, has control of A?

8. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Control Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities A parent is an entity that has one or more subsidiaries A subsidiary is an entity controlled by another entity

9. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Group structure examples B subsidiary of AS1 is not a subsidiary of H S, S1 and S2 all subsidiaries of H S1 is not a subsidiary of H

10. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Minority interest or non- controlling interest Minority interest is that part of the subsidiary that the holding (parent) entity does not own. Or ; is that portion of the profit or loss and the net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent

11. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Need for group accounts To provide useful information to shareholders and other users of the holding enterprise’s financial statements about the group as a whole

12. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Goodwill Goodwill is the difference between the revalued net assets and the investment (price paid at acquisition) of the parent Goodwill can be considered as a premium on acquisition

13. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Negative goodwill Negative goodwill occurs when the investment (price paid at acquisition) of the parent is higher than the revalued net assets of the company Might occur when companies with e.g. recent history of losses are bought Discount on acquisition

14. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Preparation of simple consolidated statements of financial position Statement of financial position at date of acquisition Consolidated statement of financial position later than date of acquisition Subsequent adjustments to purchase price Inter-company trading and the elimination of unrealised profits Reconciliation of inter-company balances Consistency of reporting dates and accounting policies within the group

15. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Example 25.1 the statements of financial position of H and S as at 31 December 200X H in €S in € Tangible non-current assets 140 00045 000 Investment in S 75 000 Net current assets 20 00015 000 Total235 000 60 000 Share capital150 000 50 000 Reserves 85 00010 000 Total235 000 60 000

16. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Example 25.1 (cont’d) H acquired the whole of the share capital of S for cash on 31 December 200X. The fair value of S’s net assets at this date were € 67 000. Prepare the consolidated statement of financial position of H group as at 31 December 200X. To do this consolidation there are several steps: 1. calculate goodwill 2. revaluate the net assets of the subsidiary S to fair value 3. Consolidate H and S

17. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA GOODWILL Fair value of purchase price 75 000 Fair value of 100% net assets acquired 67 000 Goodwill 8 000

18. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Revalued Statement of financial position Net assets 67 000 Share capital 50 000 Reserves 10 000 Revaluation reserve 7 000

19. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Group consolidated statement of financial position Net assets (140 000+ 20 000+ 67 000) 227 000 Goodwill on acquisition 8 000 235 000 Share capital 150 000 Reserves 85 000 235 000

20. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Example 25.2: A bought 75% of S at 31 December 200X at 72 000 (=equal to the fair value of the net assets A in € at 31.12.200XB in € at 31.12.200X Net assets403 00087 000 Investment in B 72 000 475 00087 000 Share capital350 00060 000 reserves125 00027 000 475 00087 000

21. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Goodwill calculation Cost of controlNon-controlled interest Fair value of purchase price 72 000 Purchased 75% of shares 60 000 45 00035% x 60 00015 000 Plus 75% reserves at acquisition 27 000 20 25025% x 27 000 6 750 65 25021 750 goodwill 6 750

22. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Consolidated statement of financial psoition for A group as at 31 December 200X Net assets490 000 goodwill 6 750 496 750 Share capital (only A even though ownership not 100%) 350 000 Reserves (only A)125 000 475 000 Non-controlling interest 25% x 87 000 21 750 496 750

23. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Consolidated statement of financial position later than the date of acquisition All reserves prior to acquisition belonging to the subsidiary are taken to the cost of control or belong to the non-controlling interest. We can only include the parent share of the reserves post acquisition in the consolidation

24. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.5 The statements of financial position of H and S at the date H acquired 1 million 10p shares of S at a fair value of £ 120 000 for cash (the transaction has not yet been entered in H’s accounts). The fair value of S’s net assets at the date of acquisition were £ 142 000 (£108 000 land and buildings, £ 22 000 plant and equipment, £ 12 000 net current assets). Prepare the consolidated statement of financial position of H group as at 31.12.200X at acquisition

25. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Statements of financial position at the date S acquired H H £000sS £000s Land and buildings650105 Plant and equipment110 21 Net current assets163 11 923 137 Share capital £1 shares800 Share capital 10p shares 125 reserves123 12 923 137

26. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity feedback 25.5 Cost of controlNon controlled interest Purchase price FV120 80% shares10020% shares25 80% reserves9.620% reserves 2.4 80% revaluation420% revaluation 1 113.628.4 goodwill6.4

27. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Consolidated statement of financial position of H group as at 31 December 200X £ 000s Land and buildings (650 + 108)758 Plant and equipment (110 +22)132 goodwill6.4 Net current assets (163-120+12)55 951.4 Share capital £1 shares (only H)800 Reserves (only H, S either cost of control or non-controlled interest) 123 923 Non-controlled interest28.4 951.4

28. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Acquisition accounting later than the date of acquisition (Activity 25.6) H Ltd purchased 80% of the equity share capital of S Ltd for cash at 31 December year 1 at a price of €1.50 per share, when the balance on S Ltd’s reserves stood at €2 000. The consolidation is required to be made at 31 December year 2, at which point the individual statements of financial position of the two companies are as follows:

29. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Acquisition accounting later than the date of acquisition (Activity 25.6) H Ltd €S Ltd € Sundry current assets35 0006 000 Investment in S Ltd9 600– Plant and machinery60 0005 000 104 60011 000 Represented by shares of €140 0008 000 Reserves64 6003 000 104 60011 000

30. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.6 feedback Sundry current assets41 000 Plant and machinery65 000 Goodwill 1 600 107 600 Share capital40 000 Reserves65 400 105 400 Minority interests 2 200 107 600

31. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Subsequent adjustments to purchase price Acquisition agreements often provide for adjustment to the cost of an acquisition depending on future events. These can be: –The results of acquiree’s operations exceeding or falling short of an agreed level –The market price of securities issued as part of the purchase consideration being made

32. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Inter-company trading and the elimination of unrealized profits In order for a group to realize profit, the sale must be made to a customer outside of the group In the underlying individual accounts intra-group profit is included in the profit figure of the individual income statement and result of the individual company

33. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Fig 25.2 Inter-company trading and elimination of unrealized profits

34. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.9 AssetsA €000sB €000s Land and plant1 000200 Stock600400 Debtors20040 Investment in B275– 2 075640 Liabilities Creditors3016 2 045624 Represented by Shares of €11 000100 Reserves1 045524 2045624

35. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.9 feedback Consolidated statement of financial position as at 30 June 200X Assets€000s Goodwill (note 1) 50 Land and plant1 200 Stock (1000 – 10) 990 Debtors (240 – 2) 238 2 478 Liabilities Creditors (46 – 2) 44 2 434 Represented by: Shares of €11 000 Reserves1 280.5 2 280.5 Minority interest (note 3) 153.5 2 434

36. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.9 feedback (cont’d) Note 1 Cost of investment in B 275 Less ordinary shares acquired75 Reserves acquired 75% x 200150 225 50 Note 2 Reserves A1 045 Reserves post-acquired B 75% (524 – 10 – 200) 235.5 1 280.5 Note 3 Minority interest 25 25% ordinary shares 128.5 25% reserves = 25% x 514 153.5

37. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.10 The financial year-end of two entities A and B within the same group is 31 December. On 29 December A despatched goods to B to the invoice value of € 40 000 and charges B’s ledger account accordingly. B does not receive either goods or invoice until 4 January. Prepare the consolidation adjustment on B’s books and not any other adjustment that may be required on consolidation.

38. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.10 feedback B’s books as at 31 December B ledger books Dr Cr Goods in transit € 40 000 A Current account € 40 000 On consolidation the respective inner-company balances in the current accounts, which are now in agreement, will cancel out Remember this stock in transit contains unrealised profit

39. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Reconciliation of inter- company balances In relation to the group’s position as regards the outside world, these balances are internal balances and will, therefore, not require to be shown in the group statement of financial position. They are, in fact, cancelled on consolidation across the individual statements of financial position of group members. These adjustments only affect the consolidated accounts

40. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Preparation of more complex consolidated statements of financial position Acquisition by stages Reverse acquisitions Adjustments to identifiable assets or liabilities Disposal of part interest Preparation of consolidated accounts involving more than one subsidiary

41. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Acquisition by stages With staged acquisitions one needs to determine the date when a subsidiary relationship exists, what the cost was and what the fair value of the assets and liabilities acquired was. The date of acquisition = the date when control was transferred

42. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.12 Acquisition by stages H acquired an interest in S as follows: –10% of the voting shares for $150 000 on 1.4.01 –30% of the shares for $460 000 on 1.4.02 – 40% of the voting shares for $800 000 on 1.4.03 – the remaining 20% for $350 000 on 31.3.05. –The fair values of the recognized assets and liabilities of S at these dates were $1m, $1.5m, $1.75m and $2m respectively. Accounts are drawn up as at 31 March.

43. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.12 feedback $ FV at first stage1 000 000 Acquired 10%100 000 Cost150 000 Goodwill Stage 150 000 FV at second stage1 500 000 Acquired 30%450 000 Cost460 000 Goodwill stage 210 000

44. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.12 feedback (cont’d) $ FV at third stage1 750 000 Acquired 40%700 000 Cost800 000 Goodwill stage 3100 000 Total goodwill after third purchase160 000 FV at fourth stage2 000 000 Acquired 20%400 000 Cost250 000 Negative goodwill stage 450 000

45. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.12 feedback (cont’d) StageFV 1100 000 2450 000 3700 000 4400 000 1 650 000

46. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Reverse Acquisition When an enterprise obtains ownership of the shares of another enterprise but as part of the exchange transaction issues enough voting shares as consideration such that control of the combined enterprises passes to the owners of the enterprise whose shares have been acquired, then we have what has become known as a reverse acquisition. Although legally the enterprise issuing the shares may be regarded as the parent or continuing enterprise, the enterprise whose shareholders now control the combined enterprise is the acquirer.

47. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Reverse acquisition: illustration Enterprise A with a share capital of €100 shares issues a further 50 shares to acquire the complete shareholding of enterprise B consisting of 200 €1 shares, a one A share for four B shares exchange. In this case A now owns all B shares, 200,and A’s shareholders hold 100 A shares. B shareholders hold 50 A shares. Thus A shareholders retain control of A. If, however, A had issued 200 A shares to acquire the 200 B shares then B shareholders would now hold two-thirds of the shareholding of A and in ‘substance’ the acquiree, B, becomes the acquirer.

48. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Adjustments to identifiable assets or liabilities These can occur because: –the acquirer was unaware of certain assets or liabilities of the acquiree –the assets or liabilities did not satisfy recognition criteria –or further information comes to light which enables more accurate estimation of fair values

49. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Adjustments to identifiable assets or liabilities (cont’d) How these adjustments are dealt with depends on whether they occur before or after the first complete annual accounting period subsequent to acquisition: –before and the adjustment is reflected in goodwill providing the amount will be recovered from expected future economic benefits, otherwise it would be recognized as an expense –after and the adjustment is reflected in income or expense not goodwill

50. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Disposal of part of an interest When a group disposes of part of an interest in a subsidiary undertaking a profit or loss on disposal will arise. Gain or loss= the difference between the carrying amount of the net assets of that subsidiary undertaking attributable to the group’s interest before the reduction and the carrying amount attributable to the group’s interest after the reduction together with any proceeds received

51. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.13 The value of a subsidiary’s net assets at 31 March 200X is € 400 000. At this date the parent, which held a 100% share in the subsidiary, disposes of 40% for € 200 000. On the original acquisition of the subsidiary, goodwill of € 80 000 arose. This goodwill has not subsequently been impaired and is in addition to the net assets of € 400 000. Calculate the profit or loss on disposal.

52. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.13 feedback € Group share of net assets before disposal including goodwill (100% x (400 000+ 80 000)) 480 000 Group share of net assets after disposal including goodwill (60% x(400 000 + 80 000)) 288 000 Disposal proceeds200 000 488 000 Profit on disposal 8 000

53. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Preparation of consolidated accounts involving more than one subsidiary – Activity 25.15 A plc acquired 5m €1 shares of B Ltd five years ago when the reserves of B stood at € 6m. B Ltd acquired 2.25m € 1 shares in C Ltd four years ago when the accumulated reserves of C were € 0.5m. A plc also acquired 3 m € 1 share of D Ltd two years ago when D’s reserves were € 0.3m. At the date of acquisition the net book value of all assets equated to fair value. There has been no issue of shares in any of these companies throughout the five-year period. The statements of financial position relate to the group companies as at 31.12.200X

54. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.15 A €mB €mC €mD €m Fixed assets4551.52 Investment in B16 Investment in C4.5 Investment in D4 Net current assets32182.51 9727.543 Share capital187.534 reserves79201(1) 9727.543

55. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Activity 25.15 – consolidated statement of financial position A group € m Goodwill 9.025 Fixed assets 53.5 Net current assets 53.5 116.025 Share capital 18 Reserves [79 +(20-6)2/3+(1- 0.5)1/2+(-1-0.3)3/4] 87.605 Minority interest 10.42 116.025

56. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Consolidated statement of income The total revenues and expenditures of the parent and the subsidiary are included in the consolidated statement of income Intra-group balances and results need to be eliminated

57. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Consolidated statement of income: Example 25.4 High €Low € Turnover100 00050 000 Cost of sales75 00030 000 Gross profit25 00020 000 Distribution expenses4 0003 000 Administration expenses7 0008 000 14 0009 000 Investment income: Dividends received2 250 16 250 Taxation7 0003 000 Earnings9 2506 000 Retained earnings22 0004 000 31 25010 000

58. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Consolidated statement of income: example 25.4 (cont’d) HighLow Cost of High’s control of Low90 000 Bought 75% of Low’s shares75 000 Bought 75% of Low’s retained profits3 00078 000 Goodwill12 000

59. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Consolidated statement of income: example 25.4 (cont’d) Inter-company trading Reduce High’s sales by12 000 Reduce High’s profits by1 000 Reduce Low’s stock by1 000

60. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Consolidated statement of income: example 25.4 (cont’d) Consolidated statement of income for the year ended 31.12.0X €€ Turnover (150 000 – 12 000)138 000 Cost of sales (105 000 – 12 000 + 1 000)94 000 44 000 Distribution expenses7 000 Administration expenses15 00022 000 Taxation10 000 Consolidated earnings on ordinary activities after tax12 000 less Minority interest (25% x 6 000 – Low’s profit after tax)1 500 Consolidated earnings for the financial year10 500 Retained earnings22 000 32 500

61. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Questions to be solved by regulators Definition of control Method of accounting to be used for subsidiaries How to account for other business relationships Is merger accounting/pooling of interest a suitable method? Are there any other suitable methods available e.g. fresh start method?

62. International Financial Reporting and Analysis, 5 th edition David Alexander, Anne Britton and Ann Jorissen ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA Questions to be solved by regulators (cont’d) Use of fair value for purchase consideration How to deal with the goodwill within a business combination How and where should minority interests be shown within the financial statements? What other disclosure regulations are required?