1. CONSOLIDATED STATEMENT OF FINANCIAL POSITION
CHAPTER 27
CONSOLIDATED STATEMENT OF FINANCIAL POSITION

2. 27.1 INTRODUCTION
Companies frequently acquire controlling interests in other companies
Although the parent company has control over the assets and liabilities of the subsidiary, the members of the parent company do not clearly see the value which the subsidiary is having on the net assets of the group
For this reason, all holding companies are generally required to prepare separate company and consolidated FS
The consolidated financial statements attempt to show the position and earnings of the group
However, it is important to remember that consolidation is an accounting technique; legally this ‘single entity’ does not exist

3. 27.2 IDENTIFYING THE GROUP STRUCTURE
i.e. Based upon the number of ordinary shares held
P Limited purchased 60,000 shares in S Limited for €20,000. The ordinary share capital of S Limited is 100,000 shares at €1 each.
Requirement
How should S Limited be treated by P Limited?
Solution
1. P is obviously the parent company
2. Percentage holding
S Limited
Group (60,000/100,000 shares)
60%
Non-controlling interests
40%
100%
As P Limited has > 50% (presumed control) of the shareholding of S Limited, S Limited is treated as a subsidiary.

4. See Chapter 27, Example 27.2: My first consolidated statement of financial position
Note:
This example ignores goodwill (See Section 27.3), pre-acquisition reserves (See Section 27.4) and NCI (See Section 27.5).

5. 27.3 PREMIUM ON ACQUISITION
Goodwill = the future economic benefits that are not capable of being individually identified and separately recognised
Goodwill = consideration paid by parent + NCI – FV of the subsidiary’s identifiable net assets 
Purchase price > value of underlying net assets = premium on acquisition (i.e. Positive goodwill)
Purchase price < value of underlying net assets = gain on bargain purchase (i.e. Negative goodwill)
If the difference is positive, the acquirer should recognise the goodwill as an asset
If the difference is negative, the resulting gain is recognised as a bargain purchase in arriving at profit or loss for the period in the SPLOCI

6. Example 27.3: Positive goodwill
P Limited acquired all the shares in S Limited [therefore no non-controlling interest] for €50,000 at the date of incorporation [therefore no pre-acquisition retained earnings] of S Limited. At 31 December 2012 the SFP showed:
P Limited
S Limited €
ASSETS
Sundry net assets [abbreviated format for simplicity]
110,000
200,000
Investment in S Limited [i.e. the cost]
50,000 -
160,000
EQUITY
Ordinary share capital
80,000
40,000
Revenue reserves
In preparing the consolidated SFP as at 31 December 2012:
(a) net assets of S Limited at the date of acquisition were represented by share capital of €40,000 and the revenue reserves of €Nil*;
(b) cost of investment was €50,000.

7. Example 27.3: Positive goodwill
*Note that the reserves at the date of acquisition were €Nil because the shares were purchased at the date of incorporation of S Limited.
Goodwill: €
Consideration paid by parent
50,000
+ non-controlling interest [n/a – 100% acquisition] -
– FV of the subsidiary’s net identifiable assets
(40,000)
Premium on acquisition [positive goodwill]
10,000
See full solution to Example 27.3 on pages

8. 27.4 PRE-ACQUISITION PROFITS
So far the issue of pre-acquisition reserves has been ignored
(i.e.) P Limited acquired its interest at the date of incorporation of S Limited and accordingly the net assets of S Limited at the date of acquisition were represented by the share capital of S Limited since no reserves exist at date of incorporation
This is now developed by introducing pre-acquisition reserves

9. Example 27.4: Pre-acquisition profits
P Limited acquired all of the shares of S Limited after one year’s trading when its reserves were €20,000 [i.e. pre-acquisition]. The statements of financial position of the two companies at 31 December 2012 were as follows:
P Limited
S Limited €
Assets
Sundry net assets
90,000
200,000
Investment in S Limited
70,000 -
160,000
Equity
Ordinary share capital
80,000
40,000
Revenue reserves
In this situation, the net assets of S Limited at the date of acquisition were represented by the share capital plus reserves of S Limited at that date. It is both these amounts that are cancelled against the cost of investment in preparing the consolidated statement of financial position.

10. Example 27.4: Pre-acquisition profits
First, calculate the goodwill/discount on acquisition:
Goodwill: €
Consideration paid by parent
70,000
+ non-controlling interest [n/a as 100% acquisition] -
− fair value of the subsidiary’s net identifiable assets [Share capital + reserves]
(60,000)
Premium on acquisition [positive goodwill]
10,000
See full solution to Example 27.4 on pages – pay particular attention to the share capital and retained earnings figures.

11. 27.5 NON-CONTROLLING INTERESTS
Until now, the parent has acquired 100% of the subsidiary’s shares – this assumption is now relaxed
NCI = the portion of the net results and net assets of a subsidiary attributable to interests not owned directly or indirectly by the parent
See Chapter 26, Section 26.4 – IFRS 3 has an explicit option on a transaction-by-transaction basis to measure NCI at the date of acquisition at either:
fair value (new method) e.g. if available, share price of NCI equity shares; or using other valuation techniques if not publicly traded or
NCI’s proportionate share of the net identifiable assets of the entity acquired (old method)

12. NCI – old and new methods
If old method used for NCI at acquisition – goodwill relates to the parent’s share only
If new method used for NCI at acquisition – goodwill represents that of both the parent and NCI

13. Example 27.5: Non-controlling interests
P Limited acquired 80% [therefore NCI = 20%] of the ordinary share capital of S Limited for €56,000 [see ‘Investment in S Limited’ below] when S Limited reserves were €20,000 [i.e. pre-acquisition]. The SFP at 31 December 2012 showed:
P Limited
S Limited €
ASSETS
Sundry net assets
104,000
200,000
Investment in S Limited
56,000 -
160,000
EQUITY
Ordinary share capital
80,000
40,000
Revenue reserves

14. Example 27.5: Non-controlling interests
Assume that the proportionate share method equates to the fair value method when measuring NCI at the date of acquisition:
i.e. 20% of (€40,000 + €20,000) = €12,000.
[Note: Pre- and post-acquisition reserves distinction does not apply to NCI.]
The goodwill/discount on acquisition is: €
Consideration paid by parent
56,000
+ non-controlling interest
12,000
– FV of the subsidiary’s net identifiable assets
(60,000)
Premium on acquisition [positive goodwill]
8,000
The NCI in S Limited at 31 December 2012 [the reporting date]:
i.e. 20% of €200,000 = €40,000.
See full solution to Example 27.5 on pages – pay particular attention to the OSC, RE and NCI figures.

15. Example 27.6: Gain from a bargain purchase
Consolidated Statement of Financial Position as at 31 December 2012
P Limited
S Limited €
Assets
Sundry net assets
102,000
74,000
Investment in S Limited
43,000 -
145,000
Equity
Share capital (€1 shares)
100,000
50,000
Revenue reserves
45,000
24,000
P Limited acquired 37,500 shares [37,500/50,000 = 75%, therefore NCI = 25%] in S Limited at a cost of €43,000 [see ‘Investment in S Limited’ above] when S Limited’s revenue reserves were €10,000 [i.e. pre-acquisition].
Requirement
Prepare the consolidated SFP as at 31 December 2012.

16. Example 27.6: Gain from a bargain purchase
Cost of Control Account €
Cost of shares held
43,000
Share capital – S
50,000
NCI (at acquisition date)
15,000
Goodwill
2,000
Revenue reserves – S
10,000
60,000
The negative goodwill of €2,000 is credited to revenue reserves (IFRS 3).
Non-controlling Interest Account (at reporting date)
Balance c/d
18,500
12,500 -
(25% x €24,000)
6,000
Consolidated Revenue Reserves Account
CoC account (75% × € 10,000)
7,500
P Limited
45,000
Non-controlling interest
S Limited
24,000
57,500
Negative goodwill
71,000
Balance b/d

17. Example 27.6: Gain from a bargain purchase
Consolidated Statement of Financial Position as at 31 December 2012
P Limited
S Limited
Consol. Adjs.
Group SFP €
Sundry net assets
102,000
74,000 -
176,000
Shares in S Limited
43,000
[see cost of control account] (43,000)
145,000
(43,000)
Ordinary share capital
100,000
50,000
(50,000)
[P only] 100,000
Revenue reserves
45,000
24,000
(11,500)
57,500
Non-controlling interest
[€74,000 x 25%] 18,500
18,500
See full solution to Example 27.6 on pages

18. 27.6 PROPOSED DIVIDENDS
No entitlement to ordinary dividends until they are approved at the AGM
Dividends declared after the reporting date should not be recognised as liabilities unless there ‘is a legal obligation’ to receive the dividend (IAS 10 Events after the Reporting Date – See Chapter 15)

19. Incorrect proposed dividends
Where S Limited, has ‘incorrectly’ accrued a proposed dividend in its FS and P Limited has not taken credit for its share of that dividend:
DR Current liabilities – S
CR Retained earnings – S
Where S Limited has ‘incorrectly’ accrued a proposed dividend in its FS and P Limited has taken credit for its share of that dividend:
DR Investment income – P
CR Receivables – P

20. Legitimately accrued dividends
In the case of proposed dividends that have been ‘legitimately’ accrued, steps must be made to ensure that the:
(a) parent’s share of the proposed dividend of the subsidiary is not included in the group SFP as it represents an inter-company liability and only the amount due to the NCI is accrued;
(b) correct reserves figure of the subsidiary is used for the purposes of calculating NCI.
If a subsidiary has legitimately accrued proposed dividends at the year-end, it is important to ascertain whether the parent has taken credit for its share or not.

21. Example 27.7: Parent has taken credit
P Limited owns 80% of the ordinary shares of S Limited, a company that has legitimately accrued a proposed dividend at the reporting date. However, P Limited has taken credit for its share of that dividend.
Extracts from Statements of Financial Position as at 31 December 2012
P Limited
S Limited
Current Assets €
Dividends receivable
40,000 -
Current Liabilities
Proposed ordinary dividends
100,000
50,000
The proposed dividends were approved by the shareholders prior to 31 December 2012.
Solution
80% of S Limited’s dividend (€40,000) is owed to P Limited and should be eliminated on consolidation. The remainder of S Limited’s dividend is due to the NCI (€10,000) and should be disclosed in the consolidated SFP under current liabilities along with the proposed dividend of P Limited.
Journal Adjustment:
Jnl 1
DR Proposed dividends
CR Dividends receivable
To cancel the intragroup dividend
See full solution to Example 27.7 on pages

22. Example 27.8: Parent has not taken credit
P Limited owns 80% of the ordinary shares of S Limited, a company that has legitimately accrued a proposed dividend at the reporting date. However, P Limited has not taken credit for its share of that dividend.
Extracts from Statements of Financial Position as at 31 December 2012
P Limited
S Limited
Current Liabilities €
Proposed ordinary dividends
100,000
50,000
The proposed dividends were approved by the shareholders prior to 31 December 2012.
Solution
Bring in the dividend receivable into P Limited’s accounts;
Cancel the inter-group dividend; and
The remainder of S Limited’s dividend is due to the NCI.
Journal Adjustments:
Jnl 1
DR Dividends receivable
40,000
CR P Limited - SPLOCI
Jnl 2
DR Proposed dividends
CR Dividends receivable
See full solution to Example 27.8 on pages

23. 27.7 DIVIDENDS OUT OF PRE-ACQUISITION PROFITS
When P acquires S, company law dictates that the reserves of S at the date of acquisition are ‘frozen’
(i.e.) if a dividend is paid by S out of pre-acquisition profits, it cannot be recognised as income in the books of P
Traditionally, under accounting standards this was also the case, with P reducing the cost of the investment in S by the dividend received (i.e. the dividend was deemed to be a refund of part of the investment)
However, IAS 27 Separate Financial Statements states that an entity shall recognise a dividend from a subsidiary, jointly controlled entity or associate in arriving at profit or loss in its separate FS when its right to receive the dividend is established
Therefore, from an IAS/IFRS perspective, this effectively removes the pre/post-acquisition distinction with respect to dividends paid by a subsidiary as IAS 27 allows an entity to recognise a dividend paid from pre-acquisition profits from a subsidiary in arriving at profit or loss in its separate FS (albeit this is at variance with company law).

24. Example 27.9: Dividends paid out of pre-acquisition profits
On 3 September 2012 Christy Limited purchased 75% of the ordinary share capital of Voyage Limited for €1,635,000 when the issued ordinary share capital of Voyage Limited was €750,000 and the retained earnings were €1,200,000. At the date of acquisition, the fair value of the net assets of Voyage Limited was the same as their book value. In December 2012, Voyage Limited paid a dividend of €75,000 out of profits in existence at 3 September Requirement Show the calculation of goodwill under company law and extant IASs/IFRSs.

25. Example 27.9: Dividends paid out of pre-acquisition profits
Under Company Law:
The dividend is treated as a partial return of the cost of the investment in Voyage Limited. The investment in Voyage Limited is credited with the dividend received and the retained earnings of Voyage Limited at the date of acquisition are reduced by the total dividend paid. €
Cost of investment
1,635,000
Less pre-acquisition dividend received (€75,000 x 75%)
(56,250)
1,578,750
FV of net assets at acquisition date:
Ordinary share capital
750,000
Retained earnings
1,200,000
Less pre-acquisition dividend
(75,000)
1,875,000
Christy Limited’s share at 75%
1,406,250
Goodwill
172,500

26. Example 27.9: Dividends paid out of pre-acquisition profits
Under Extant IASs/IFRSs:
Christy Limited can include the dividend paid out of pre-acquisition profits in arriving at profit or loss in its SPLOCI, with the goodwill being calculated as if it was paid out of post-acquisition retained earnings. €
Cost of investment
1,635,000
Fair value of net assets at acquisition date:
Ordinary share capital
750,000
Retained earnings
1,200,000
1,950,000
Christy Limited’s share at 75%
1,462,500
Goodwill
172,500
See also Chapter 27, Example 27.10

27. 27.8 INTER-COMPANY BALANCES
Consolidated FS should present the FS of the parent and its subsidiaries as if they were the financial statements of a single entity
Particular items that often require cancellation as part of this process are:
Loans
Current accounts (Example 27.11)
Debentures (Example 27.12)
Bills of exchange (Example 27.13)
In simple terms, this requires cancelling the credit balance of one company against the debit balance of the other, thereby eliminating both balances in the consolidated FS
In practice, the balances usually do not agree and they must be reconciled first before being cancelled/eliminated

28. Example 27.11: Eliminating current accounts
Current accounts in the books of:
P Limited – with S Limited – €1,490 (debit)
S Limited – with P Limited – €740 (credit)
At year end there were in transit:
Goods – from P Limited to S Limited – €500
Cash – from S Limited to P Limited – €250
Current Account in Books of P Limited €
Balance b/d
1,490
Goods in transit
500
Cash in transit
250
____
Balance c/d
740
The goods and cash in transit will be incorporated in the consolidated SFP. The current account balance of €740 will be cancelled on consolidation against the equivalent balance in S.

29. Example 27.12: Inter-company balances
S Limited has €15,000 of 5% debentures, of which P Limited holds €10,000 and outsiders hold €5,000. The payables of S Limited amount to €25,000, of which €900 represents debenture interest payable, while receivables of P Limited amount to €30,000 of which €600 represents debenture interest receivable. In addition, the receivables of S Limited amount to €35,000 and payables of P Limited amount to €27,000.
Requirement Show the balances that should appear in the consolidated SFP for:
6% Debentures;
Receivables; and
Payables.
 Solution
P Limited
S Limited
Consolidation
Consolidated
Adjustment
SFP €
DR/(CR)
Invest in debentures
10,000 -
(10,000)
6% debentures
(15,000)
(5,000)
Payables
(27,000)
(25,000)
(600)
(51,400)
Receivables
30,000
35,000
64,400

30. 27.9 UNREALISED PROFIT ON THE INTRAGROUP TRANSFER OF ASSETS
Inventory – eliminate any unrealised profit from inventory remaining unsold at the reporting date
P sells to S
DR Consol. RE (P) CR Inventory
S sells to P
DR Consol. RE (Group %) DR NCI% CR Inventory
Non-current assets – check which company sold the asset and whether depreciation should be adjusted

31. Example 27.14: Inventory profit
At the reporting date, S Limited’s inventory includes €3,200 of goods at invoice price bought from P Limited. P Limited adds 331/3% to cost. P Limited owns 80% of S Limited.
Therefore S Limited’s inventory should be recorded at its original cost to P (the group).
The unrealised profit is €3,200 × 331/3
= €800
1331/3
DR Consolidated RE €800
CR Inventory €800

32. Example 27.15: From parent to subsidiary
During the year P Limited (which owns 80% of the ordinary share capital of S Limited) sold to S Limited a tangible non-current asset for €30,000. The asset had been bought by P Limited on the first day of the current year for €24,000 and had thus not been depreciated by P Limited. Depreciation is provided within the group at 10% per annum on a straight-line basis. The journal adjustments would be as follows: €
DR Consolidated Reserves
6,000
CR Tangible non-current assets
Being the elimination of unrealised profit on inter-group transfer of non-current assets.
DR Tangible non-current assets – Accum. depreciation
600
CR Reserves S
Being the correction of accumulated depreciation on assets transferred to group companies (10% x 6,000).

33. Example 27.16: From subsidiary to parent
On , S Limited sold a tangible non-current asset for €100,000 to P Limited. The asset cost S Limited €50,000 on 1.1.X1. Depreciation is charged by the group at 10% per annum on a straight-line basis. P Limited owns 75% of S Limited. The current year-end is €
Cost to the group
1.1.08
50,000
Depreciation
2008
(5,000)
2009
NBV at date of transfer
1.1.10
40,000
Value transferred
100,000
Unrealised profit
60,000
DR Consolidated reserves (group share) (€60,000 x 75%) €45,000
DR Non-controlling interest (NCI share) (€60,000 x 25%) €15,000
CR Tangible non-current asset – cost €60,000
Being the elimination of the unrealised tangible non-current asset profit.

34. Example 27.16: From subsidiary to parent
An adjustment is also required to correct three years of over-depreciation in the books of P Limited. €
100,000 x 10% x 3 years
30,000
Correct depreciation, i.e. based on cost to the group
50,000 x 10% x 3 years
15,000
DR Tangible Non-current asset – Depreciation
€15,000
CR Consolidated Reserves
As there has been over-depreciation charged by P, tangible non-current assets are valued too low.

35. 27.10 REVALUATION OF TANGIBLE NON-CURRENT ASSETS
In most cases, on acquisition of a subsidiary, the assets of the subsidiary would have been revalued for the purpose of determining the purchase price. This revaluation should be preferably recorded by the subsidiary in its own separate accounts. Failing this, the revaluation should be made as a consolidation adjustment as follows:
DR Non-current assets
CR Cost of control account (group’s share)
CR NCI (their share)
Where a consolidation adjustment is made, depreciation should also be adjusted appropriately if the net assets revalued include any tangible non-current assets. This adjustment should be debited to the subsidiary company’s reserves. The NCI should then be charged with their share of the adjustment, while the remainder should be charged against post acquisition reserves.
 See Chapter 27, Example 27.17

36. Finally, See Chapter 27, Example 27
Finally, See Chapter 27, Example 27.18: Consolidated statement of financial position