Academy of Professional Accounting (APA)accaspace.com/upload/ACCA_F3/PPT/F3_Chapter_27_The... · 2016-06-12 · Consolidation Procedure Approach to CSOFP Step 4 Read through the additional

Provided by Academy of Professional Accounting (APA)

Professional Accounting Education

Copyright © ACCAspace.com ACCAspace 中国ACCA特许公认会计师教育平台

ACCA F3

Financial Accounting (FA)

财务会计第二十七讲

ACCA Lecturer: Rachel Xu

Copyright © ACCAspace.com ACCAspace 中国ACCA特许公认会计师教育平台 2

G1&G2 Part 2: The Consolidated Statement of Financial Position

Consolidated procedure

Preparing consolidated statement of financial position


Consolidation Procedure

Basic procedure

Consolidate 100% assets and liabilities of P + S

Only show share capital of P

Retained earnings: 100% P + group share of post – acquisition

retained reserves of S less consolidation adjustments

Non-controlling interest: NCI share of S’ consolidated assets

less liabilities or fair value



Consolidated method for statement of financial position (SOFP)

Part of SOFP Action required Reason

Assets & liabilities (excluding the

investment in subsidiary)

Add parent and subsidiary’s assets

and liabilities line by line To show control

Investment in subsidiary Cancel with share capital and pre-

acquisition reserves of subsidiary

From a group perspective, the

shares are held internally so need to

be eliminated.

The pre-acquisition reserves of the

subsidiary were not generated

under the parent’s control and

should be eliminated.

Share capital & share premium Show the parent’s only

To show ownership

Group accounts are prepared for the

parent’s shareholders and the

subsidiary’s share capital/premium

is eliminated above.

Reserves

Show the parent’s plus the group

share of post acquisition reserves of

subsidiary

To show ownership

Only want to include subsidiary’s

reserves generated under parent’s

control.


Consolidation procedure

Consolidation statement of financial position as at 31 December 20x2

Assets $ $

Non-current assets

Tangible assets 120,000

Goodwill (W) 21,000

Current assets

Trade receivables 43,000

Inventories 13,000

56,000

Total assets 197,000

Equity and liabilities

Equity attributable to owners of the parent

Ordinary shares of $1 each 100,000

Retained earnings (W) 52,500

152,000

Non-controlling interest (W) 17,500

170,000

Current liabilities 27,000

Total equity and liabilities 197,000



Approach to CSOFP

Step 1 Read the question (requirement first) and draw up

the group structure (W1), highlighting useful information:

The % owned

Acquisition date

Pre-acquisition RE

Consideration



Approach to CSOFP

Step 2 Draw up a pro forma taking into account the group

structure identified:

Leave out cost of investment

Put in a line for goodwill

Remember to include non-controlling interests

Leave lines in case of any additions.



Approach to CSOFP

Step 3 Work methodically down the statement of financial

position, transferring figures to pro forma or workings:

100% of all assets / liabilities controlled at the year end

aggregated in brackets on face of pro forma, ready for

adjustments

Share capital and share premium (parent only) to face

of pro forma answer



Approach to CSOFP

Step 4 Read through the additional notes and attempt the

adjustments of net assets of subsidiary

Examples:

Cancel any intra group items, e.g., current a/c balances,

loans

Adjust for unrealised profits

Make fair value adjustments



Approach to CSOFP

Step 4 (working 2: net assets of subsidiary)

Acquisition date ($) Consolidation date ($) Movement ($)

Share capital X X

Share premium X X

Retained earnings X X X

Fair value adjustment X X

Unrealised profit (X) (X)

(only S P)

X1 X2 X3



Approach to CSOFP


1. Fair value adjustment of subsidiary

Fair value is the price that would be received to sell an asset or

paid to transfer a liability in an orderly transaction between

market participants at the measurement date.

As acquisition date, put an adjustment into the Net Assets

workings of the subsidiary to bring the net assets to fair value. At

the consolidation date, any adjustment remaining from acquisition

must be accounted for both on the case of SOFP and in the net

assets working.



Learning example

X acquired 300,000 of Y’s 400,000 $1 ordinary shares on 1

January 20x5 when Y’s retained earnings were $500,000. The

fair value of the non-controlling interest in Y at that date was

$280,000.

The purchase consideration: $850,000 in cash.

The fair value of Y’s land and buildings at 1 January 20x5 was

$160,000 but the book value was only $100,000. All other net

assets had a fair value equivalent to their book value.

Required: Calculate the goodwill arising on acquisition of Y.



Approach to CSOFP


2. Cancellation of intra-group transaction

Intra-group trading (inventory) receivables cancel payables:

Dr Payables

Cr Receivables

URP in inventory

P S S P

Dr Group RE Dr Group RE & NCI

Cr Group inventory (URP) Cr Group inventory (URP)



Approach to CSOFP


2. Cancellation of intra-group transaction

Intra-group trading (inventory)

In the buying company’s accounts, inventory will be valued at acquisition

cost which now includes the profit element earned by the selling

company. The problem is that from the group’s point of view this profit

has not yet been realised because no sale has been made outside the

group and therefore closing inventories are overstated by the unrealised

profit element.

Remember that the objective of consolidated account is to reflect the

financial results and position of the group as a single entity. To achieve

this, we need to make an adjustment.



Intra-group trading

Learning example

Given below are extracts from the financial statement of P and S.

P owns 100% of the share capital of S.

The receivables in P include $3,000 due from S and the payables

in S include $3,000 due to P.

What amounts should appear in the consolidated statement of

financial position for receivables and payables?

P ($) S ($)

Receivables 20,000 10,000

Payables 14,000 8,000



Learning example

Lilac acquired 80% of Magenta three years ago. During the

current financial year, Magenta sold goods to Lilac for $63,000.

The profit on this sale was 10% of selling price. At the year-end,

30% of these goods remain unsold in the inventories of Lilac.

What is the provision for unrealised profit?

A. $1,512

B. $1,890

C. $3,528

D. $4,410



Learning example

P acquired 80% of the ordinary shares of S on 1 April 20x5.

On 31 December 20x4, S Co.’s accounts showed a retained

earnings of $15,000. On 31 December 20x5, the retained

earnings of S is $39,000. What is the pre-acquisition

retained earning of S? (you should assume that profits have

accrued evenly over the year to 31 December 20x5)



Approach to CSOFP

Step 5 Complete goodwill calculation

(working 3: goodwill at acquisition date)

$

Cost of investment X

Less: P’s share of FV of S’ NA at acquisition date (X)

Goodwill on consolidation (P’s share) X

Non-controlling interest at fair value X

Less: NCI share of FV of S’ NA on acquisition date (X)

Goodwill on consolidation (NCI share) X

Goodwill at acquisition X



Approach to CSOFP



$

Cost of investment X

Non-controlling interest at fair value X

Less: FV of S’ NA at acquisition date (X)

Goodwill at acquisition X



Approach to CSOFP



Cost of investment:

Cash paid

Share for share exchange

Fair value of the consideration at acquisition



Approach to CSOFP



Cost of investment: share for share exchange

Calculate the value of consideration (use the market price)

The extra share capital and share premium should be added

to group account



Approach to CSOFP

Step 6 Complete the NCI calculation

(working 4: non-controlling interest)

$

FV of net assets of S at consolidation date * NCI% X

(X2 in working 2 * NCI%)

Goodwill (NCI share) X

Total non-controlling interest a



Approach to CSOFP

Step 6 Complete the NCI calculation

(working 4: non-controlling interest)

$

NCI at acquisition [at fair value] (from goodwill working) X

NCI share of post acquisition reserves

[(year end reserves – pre-acquisition reserves)] * NCI% X

NCI at year end (i.e., NIC share of year end net assets

& goodwill) * from reserves working a



Approach to CSOFP

Step 7 Complete the Group retained earnings calculation

(working 5: group retained earnings)

$

Parent’s retained earnings (100%) X

Add: S’ group share of post-acquisition RE X

S% mulitiply X3

Less: URP (P S) (X)

Group retained earning X


Preparation

Learning example

Prestend is the parent company of Northon. The following

are the statements of financial position for both companies

as at 31 October 20x7.


Preparation

Prestend Northon

$’000 $’000 $’000 $’000

Assets

Non-current assets

Property, plant and equipment 4,200 3,300

Investments: share s in Northon at cost 3,345 ----

Current assets

Inventory 1,500 8,00

Receivables 1,800 750

Bank 600 350

3,900 1,900

Total assets 11,445 5,200

Equity and liabilities

Equity

$1 ordinary shares 9,000 4,000

Retained earnings 525 200

9,525 4,200

Current liabilities

Payables 1,220 200

Tax 700 800

Total equity and liabilities 11,4454 5,200


Preparation

The following information is also available.

a) Prestend purchased 2,800,000 shares in Northon a year

ago when Northon had retained earnings of $60,000. The

fair value of the non-controlling interest at the date of

acquisition was $1,415,000.

b) During the year Prestend sold goods with an invoice value

of $240,000 to Northon. These goods were invoiced at cost

plus 20%. Half of the goods are still in Northon’s inventory

at the year end.

c) Northon owes Prestend $30,000 at 31 October 20x7 for

goods it purchased during the year.


Preparation

Required

Prepare the consolidated statement of financial position for

the Prestend group as at 31 October 20x7.

Note

A working should be included for group retained earnings.

Disclosure notes are not required.


Summary

Provided by Academy of Professional Accounting (APA)

Professional Accounting Education

Documents

Academy of Professional Accounting (APA)accaspace.com/upload/ACCA_F3/PPT/F3_Chapter_27_The... · 2016-06-12 · Consolidation Procedure Approach to CSOFP Step 4 Read through the additional