1. Financial Statements 2 2009/10
Consolidations 1 – Introduction and consolidated statement of financial position

2. What is a group? Parent company Subsidiary companies Parent Subsidiary

3. What is a subsidiary? A company controlled by another company
Control may be because:
The parent owns the majority of the voting rights (usually by owning more than half the ordinary shares)
The parent can appoint a majority of the directors
The parent can exercise dominant interest

4. What are consolidated accounts?
Present the results of the group as if it were one single entity (substance over form)
All the transactions of a subsidiary are under the control of the parent
All results are the responsibility of the parent
The shareholders of the parent company need to be fully informed about all the actions of the directors, including their management of subsidiaries

5. The acquisition method
Add together similar items in the parent and subsidiary accounts
Cancel inter-company transactions and balances
Allow for any non-controlling interest
Account for goodwill

6. Top part of the statement of financial position
This is the operational assets and liabilities of the group. These are always under the full control of the group so 100% of parent and subsidiary are added
Any inter-company balances are cancelled out
Goodwill on acquisition is included as an intangible non-current asset

7. Bottom part of the SFP This represents ownership
Share capital is always just the parent company
Each reserve is:
100% of parent company
Share of subsidiary’s post-acquisition reserve

8. Example 1 – a simple consolidation
H has bought 100% of S
The investment of H and the share capital of S need to be cancelled out.
All other assets and liabilities are added together
Share capital is only H
S has been owned since incorporation so all retained earnings are post-acquisition and are included
Retained earnings are therefore

9. Example 1 – consolidated statement of financial position of H Ltd
Financial Statements /10
Example 1 – consolidated statement of financial position of H Ltd
£000 £000 Non Current Assets Equity Freehold land Ordinary shares Plant Retained Profits 450 Current Assets Inventory Receivables Cash Current Liabilities Trade creditors Corporation tax Non current liabilities 10% debentures

10. Example 2 – cancellation of internal items
H has bought 100% of S share capital and some debentures
Investment 1 of H and the share capital of S need to be cancelled out.
Investment 2 and the debentures of S need to be cancelled. NB H owns 60,000, not all of them.
Dividend receivable by H needs to be cancelled with the dividend payable of S
Inter-company balances must always be cancelled

11. Example 2 – consolidated statement of financial position of H Ltd
£000 £000 Non current assets Equity PPE 380 Ordinary shares Retained Profit Current Assets 580 Other 390 Current liabilities Dividends payable Other creditors (140) Non current liabilities £1 8% debentures 580

12. Example 3 – non-controlling interest
Less than 100% of S is owned by H – S owns 80,000 out of 100,000 shares so owns 80%. The non-controlling shareholders own 20%
H still controls 100% of the assets and liabilities of S
Top part of SFP reflects control – add 100% of S to H

13. Example 3 – non-controlling interest
Bottom part of SFP reflects ownership
SC is H only
Retained earnings is H plus share of post-acquisition earnings of S:
Non-controlling interest shows the amount owned by the non-controlling shareholders: shareholders’ funds of S times the non-controlling share:

14. Example 3 – consolidated statement of financial position of H Ltd
£000 Non current Assets PPE 180 Current assets 160 Current liabilities (70) 270 Equity Ordinary shares Retained Profit Non-controlling interest

15. Example 4 As example 3 plus Cancel inter-company balance:
Dividend payable by S x H share
The remaining dividend is due to the NCI so remains as a liability

16. Example 4 – consolidated statement of financial position of H Ltd
£000 Non current Assets PPE 180 Current Assets Other current assets 152 Current liabilities Sundry (60) Dividends payable 270 Equity Ordinary shares of £1 Retained Profit Non-controlling interest

17. Example 5 – Preference share capital with non-controlling interest
Calculate percentage interest in ordinary shares and preference shares
Voting rights attach only to ordinary shares
Retained earnings all belong to the ordinary shareholders
Preference shareholders are only interested in the preference share capital
NCI is in both the preference and ordinary shares

18. Example 5 – Workings W1 percentage shareholdings:
Ordinary shares 30,000/40,000 =
NCI in ordinary shares =
Preference shares 18,000/20,000 =
NCI in preference shares =
W2 Non-controlling interest
Prefs
Ords
W3 Retained earnings H S

19. Example 5 – consolidated statement of financial position of H Ltd
£000 Non-current Assets PPE 110 Current Assets 130 Current Liabilities (60) 180 Equity Ordinary shares of £1 Retained Profit Non-controlling interest

20. Example 6 Calculate percentage interests in prefs and ord shares
Cancel inter-company dividends
Calculate non-controlling interests
Calculate retained earnings

21. Example 6 – workings W1 percentage shareholdings:
Ordinary shares 70,000/100,000 =
NCI in ordinary shares =
Preference shares 36,000/60,000 =
NCI in preference shares =
W2 Non-controlling interest
Prefs
Ords

22. Example 6 – workings W3 Inter-company dividend Retained earnings Pref
Ord
Retained earnings H S

23. Example 6 – consolidated statement of financial position of H Ltd
£000 Non current Assets PPE 370 Current Assets Other 200 Current Liabilities Dividend payable -ordinary -preference Other (110) 410 Equity Ordinary shares 250 Retained Profit Non-controlling interest

24. Summary Calculate percentage shareholdings
Calculate NCI as % x net assets of S
Calculate retained earnings as H plus % share of post-acquisition earnings of S
Add together parent and subsidiary
Cancel inter-company balances such as debentures, dividends
Consolidated SC is always only H