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

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
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.

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 was still in inventory at 31 December
Group accounting policies
Increase non-current assets by 100% of excess.

16. The Prose Group – asset section

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.