1. Chapter 24
Preparation of Consolidated Statements of Comprehensive Income, Changes in Equity and Cash Flows

2. Objectives By the end of this chapter, you should be able to:
prepare a consolidated statement of comprehensive income;
eliminate inter-company transactions from a consolidated statement of comprehensive income;
attribute comprehensive income to the non- controlling shareholders;
prepare a consolidated statement of changes in equity;
prepare a consolidated statement of cash flows.

3. Consolidated income statements
Treatment in consolidated income statement of:
Unrealised profit on inter-company inventories
Pre-acquisition profits
Dividends or interest paid out of pre-acquisition profits
Adjustment required when a subsidiary is acquired part of the way through the year.

4. Example: Ante Group – pp.620-623 (pp.431-434)
At the date of acquisition on 1 January 20X2
Ante acquired
75% of the common shares and
20% of the preferred shares in Post plc
The retained earnings of Post were £30,000
Ante paid £10,000 more than the fair value of the net assets acquired.

5. Example – Ante Group (Continued)
During the year ended 31 December 20X2
Ante had sold Post goods at their cost price of £9,000 plus a mark up of a third
At the end of the financial year on 31 December 20X2
Half of these goods were still in the inventory at the end of the year
20% is to be written off goodwill as an impairment loss.

6. Example – Ante Group (Continued)
Statement of comprehensive income for the year ended 31 December 20X2
Ante £ Post £ Consolidated £
Sales , , , Notes 1/3
Cost of sales , , , Notes 1/2/3
Gross profit , , ,500
Expenses , , , Note 4
Impairment of goodwill , Note 5
Profit from operations80, , ,418

7. Ante example – Note 1
1. Eliminate inter-company sales on consolidation
Cancel the inter-company sales of 12,000 (9, /3) by
(i) Reducing the sales of Ante from 200,000 to 188,000 and
(ii) Reducing the cost of sales of Post by the same amount from 60,000 to 48,000

8. Ante example – Note 2
2. Eliminate unrealised profit on inter-company goods that were still in inventory
(i) Ante had sold the goods to Post at a mark up 3,000
(ii) Half the goods remain in the inventories of Post at the year-end
(iii) From the Group’s view there is an unrealised profit of half of the mark up, that is 1,500. Therefore:
– Deduct 1,500 from the gross profit of Ante by adding this amount to the cost of sales
– Add this amount to a provision for unrealised profit
– Reduce the inventories in the consolidated statement of financial position by the amount of the provision (as explained in the previous chapter).

9. Ante example – Notes 3 to 5

10. Ante example – Note 6 6. Accounting for the inter-company dividends
(i) The common dividend 3,750 received by Ante is 75% of the 5,000 dividend payable by Post
(ii) Cancel the inter-company dividend receivable by Ante with 3,750 dividend payable by Post, leaving the 1,250 dividend payable by Post to the non-controlling interest (the 1,250 will be included in the consolidated statement financial position non-controlling interest figure)
(iii) The preferred dividend of 600 received by Ante is 20% of the 3,000 payable by Post
(iv) Cancel 600 preferred dividend receivable by Ante with 600 of the preferred dividend payable by Post
(v) The balance of 2,400 remaining is payable to the non-controlling interest and 2,400 will be included in the consolidated statement of financial position non-controlling interest figure.

11. Ante example – Note 7

12. Ante example – Note 8

13. Ante SOCE

14. Ante SOCE (Continued)

15. Ante SOCE (Continued)
Note 2: Opening balance for non-controlling shareholders
54,000 x 25% = 13,500. The relevant percentage to use is 25% because only ordinary shareholders will have any interest in retained profits.
Note 3: Dividends paid
In the Ante Group column the dividends paid are those of the parent only. The parent share of Post dividends is cancelled by Ante’s investment income. Non-controlling share is dealt with in their column. Non-controlling shareholders dividends are 25% of 5, % of 3,000

16. Adjustment where non-current asset is acquired from a subsidiary
Digdeep plc is a civil engineering company that has a subsidairy, Heavylift plc that manufactures digging equipment
Assume that at the beginning of the financial year Heavylift sold equipment costing £80,000 to Digdeep for £100,000
It is Digdeep’s depreciation policy to depreciate at 5% using the straight line method.

17. Revenue adjustment
On consolidation, the following adjustments are required:
Revenue is reduced by £20,000 and the asset is reduced by £20,000 to bring the asset back to its cost of £80,000
Revenue is then reduced by £80,000 and cost of sales reduced by £80,000 to eliminate the intra-group sale
Depreciation needs to be based on the cost of £80,000 by crediting depreciation and debiting the accumulated depreciation. The depreciation charge was £5,000 (5% of £100,000), it should be £4,000 (5% of £80,000) so the adjustment is:
DR: Accumulated depreciation £1,000
CR: Depreciation in the statement of income £1,000

18. Subsidiary acquired part way through year
Restrict profits recognised in consolidated accounts
Only include post acquisition profit.

19. Tight example – pp.625-627 (pp.435-437)
At the date of acquisition on 30 September 20X1
Tight acquired
75% of the common shares and
20% of the 5% bonds in Loose
The retained earnings of Loose were £69,336
Tight paid £10,000 more than the book value of the net assets acquired
The book value and fair value were the same.

20. Tight example (Continued)
During the year
All income and expenses accrued evenly
Dividend receivable may be apportioned on a time basis
On 30 June 20X0 Tight sold Loose goods for £4,000 plus a mark-up of one-third.

21. Tight example (Continued)
At the end of the financial year
Tight prepares consolidated accounts at 31 December
Half of intra-group goods were still in stock.

22. Tight income statements

23. Tight income statements (Continued)

24. Tight – Notes 1 to 3

25. Tight – Note 4 4. Accounting for inter-company interest
The interest receivable by Tight is apportioned on a time basis, 9/12  2,000  1,500 is treated as being pre-acquisition and deducted from the cost of the investment in Loose.
The remainder (£500) is cancelled with £500 of the post-acquisition elements of the interest payable by Loose. The interest payable figure in the consolidated financial statements will be the post-acquisition interest less the inter-company elimination which represents the amount payable to the holders of 80% of the bonds.
Total interest payable 10,000  pre-acquisition 7,500  inter-company 500  £2,000

26. Tight – Notes 5 and 6 £ 5. Accounting for inter-company dividends
Amount receivable by Tight = 3,600
The dividend receivable by Tight is apportioned on a time basis, the
pre-acquisition element is credited to the cost of the investment in Tight’s
balance sheet, that is 9/12  3,600 = (2,700)
The post-acquisition element is cancelled with part of the dividend payable
in Loose’s income statement prior to consolidation = (900)
Amount credited to consolidated income statement NIL
6. Aggregate the tax figures
This includes the whole of the parent’s tax and the time apportioned
subsidiary’s tax, that is 14,004 + (6,000  3/12) = £15,504
The group taxation is that of Tight plus 3/12 of Loose

27. Tight – Note 7

28. Tight – published format

29. Tight – published format (Continued)

30. Subsidiary acquired during the year

31. Review questions
Explain why the dividends deducted from the group in the statement of changes in equity are only those of the parent company.
Explain how unrealised profits arise from transactions between companies in a group and why it is important to remove them.
Explain why it is necessary to apportion a subsidiary’s profit or loss if acquired part­way through a financial year.
Explain why dividends paid by a subsidiary to a parent company are eliminated on consolidation.

32. Review questions (Continued)
Give five examples of inter­company income and expense transactions that will need to be eliminated on consolidation and explain why each is necessary.
A shareholder was concerned that following an acquisition the profit from operations of the parent and subsidiary were less than the aggregate of the individual profit from operations figures. She was concerned that the acquisition, which the directors had supported as improving earnings per share, appeared to have reduced the combined profits. She wanted to know where the profits had gone. Give an explanation to the shareholder.