1. AC506 lecture 7 Pre-acquisition reserves
Consolidated profit and loss account

2. Pre- and post-acquisition reserves
When a parent acquires a subsidiary during the financial period or at a date subsequent to the date of incorporation of the subsidiary (when the subsidiary has accumulated reserves), for consolidation purposes it is necessary to distinguish between pre-acquisition and post-acquisition reserves

3. Example
P Ltd purchased 80% of the equity share capital of S Ltd at a cost of €9,600 on 1 January At that date, the revenue reserves of S Ltd amounted to €2,000
Prepare the consolidated balance sheet as at 31 December 2000

4. Consolidated Profit and Loss
Previously dealt with profit and loss implications of associates and JVs
Consolidation of profit and loss account of parent and subsidiaries follow same logic as balance sheet - parent plus group share of subsidiaries. Eliminate intra-group items.

5. Standard P&L adjustments
Intra-group turnover
Intra-group stock
Intra-group charges
Minority interest
Dividend shuffle and holding company dividend
Retained profit brought forward

6. Example Apple Limited acquired the following in 1987:
90,000 of 100,000 issued €1 ordinary shares in Pear Limited
180,000 of 200,000 issued €1 ordinary shares in Plum Limited
20,000 of 100,000 issued 1% €1 preference shares in Plum Limited
Apple controls all the operating and policy decisions in both Pear and Plum
The reserves balances of Pear Limited and Plum Limited at the date of acquisition were €1,600 dr and €5,800 cr respectively
Prepare consolidated profit and loss account for the Apple Group

7. Intra-group turnover
During the financial year, Apple sold goods to Plum for €48,000.
=> Intragroup sales and purchases amounts to be eliminated
Of these, Plum holds stock costing Plum €2,700 at year-end.
Unrealised profit to be eliminated from cost of sales and stock asset
Apple makes a 20% gross profit based on cost on all intra group sales.
=> Amount to be eliminated = 2,700/6 = €450

8. Intra-group charges
Included in Pear’s administrative expenses is a holding company management charge of €2,000. This has been recognised in the books of Apple as management fee income.
Eliminate all management charges, interest on loans, debenture interest charged by one group company to another.

9. Minority interest
Although Apple has control over the activities of the companies in the group, it does not have legal title to 100% of the shares and consequently to 100% of the profits.
We must calculate and show the amount attributable to the minority interest
=>Minority interest of Pear is 10% of the ordinary shares; and
=>Minority interest of Plum is 10% of the ordinary shares and 80% of the preference shares

10. Intragroup dividends
Once minority interest has been deducted from total profit, all amounts in the consolidated profit and loss account are group share only => net of minority interest
Apple has included dividend income in its sundry income
Eliminate from Apple income and corresponding dividend payments in Pear and Plum. Note there is no change to the profit retained by the group as a result of the intragroup elimination

11. Reserves brought forward
Pear €1,600 dr
Plum €5,800 cr
Exclude pre-acquisition reserves (Adjust 1)
Include group share of post-acquisition reserves only (Adjust 2)