Chapter 18: Consolidated statement of financial position

This chapter gives a comparison of FRS 102 Section 19 and IFRS, and covers the requirements for business combinations and goodwill, disclosures, and group reconstructions. A chapter on impairment of assets – part of a one-stop-shop guide by Steve Collings on all aspects of UK auditing standards and new UK GAAP accounting standards. Because an investment entity is not required to consolidate its subsidiaries, intragroup related party transactions and outstanding balances are not eliminated [IAS 24.4, Prepaid Expenses Journal Entry Definition, How to Create, & Examples IAS 39.80]. At FA/FFA level, it is assumed that control exists if the parent company has more than 50% of the ordinary (equity) shares – ie giving them more than 50% of the voting power. Print and review the financial statements for the parent company, and investigate any items that appear to be unusual or incorrect. If the parent company runs a consolidated payables operation, verify that all accounts payable recorded during the period have been appropriately charged to the various subsidiaries.

As only half of the items remain in inventory, the inventory value is overstated by half of that profit – that is, $500. Candidates should be aware that in many FA/FFA exam questions, you will be expected to calculate the profit made by using margins or mark-ups, which are not discussed here. Adjustments for unrealised profits

Another common adjustment that you could be asked to deal with is the removal of unrealised profit. This arises when profits are made on intra-group trading and the related inventories have not subsequently been sold to customers outside the group. Until inventory is sold to entities outside the group, any profit is unrealised and should be eliminated from the consolidated financial statements.

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They are capitalised at the date of acquisition by including them in the goodwill calculation. Goodwill is an asset representing the future economicbenefits arising from other assets acquired in a business combinationthat are not individually identified and separately recognised. IFRS 5 provides that an investment in a subsidiary which is heldwith an intention to resell in the near future (approximately within oneyear) should not be consolidated. An example of this is a foreign investment where the overseasgovernment has imposed restrictions.

• This arises when profits are made on intra-group trading and the related inventories have not subsequently been sold to customers outside the group.
• This is because, although we have used OT questions to demonstrate how the consolidation principles could be examined, they could also be assessed using the MTQs in part B of the exam.
• Consolidated financial statements are used when the parent company holds a majority stake by controlling more than 50% of the subsidiary business.
• This is normally achieved in consolidation workings(discussed in more detail below).

If the parent company allocates its overhead costs to subsidiaries, calculate the amount of the allocation and charge it to the various subsidiaries. The term consolidate comes from from the Latin consolidatus, which means “to combine into one body.” Whatever the context, to consolidate involves bringing together some larger amount of items into a single, smaller number. For instance, a traveler may consolidate all of their luggage into a single, larger bag. (1) Determine the value of closinginventory included in an individual company’s accounts which has beenpurchased from another company in the group. In some situations a parent may not own all of the shares in thesubsidiary, e.g. if P owns only 80% of the ordinary shares of S, thereis a non-controlling interest of 20%. Goodwill on acquisition is calculated by comparing the value of the subsidiary acquired to its net assets.

Control

When preparing a consolidated statement of financial position, the assets and liabilities of the parent and the subsidiary are added together and then subject to consolidation adjustments. Finally, the consolidated statement of financial position can be prepared. The parent’s investment in the subsidiary is eliminated as an intra-group item and is replaced with the goodwill. The assets and liabilities are then added together in full (100%) as, despite the parent only owning 80% of the shares of the subsidiary, the subsidiary is fully controlled. There is a consolidation adjustment in respect of the fair value adjustment on the PPE. IFRS 10 Consolidated Financial Statements outlines the requirements for the preparation and presentation of consolidated financial statements, requiring entities to consolidate entities it controls.

Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. In the FA/FFA exam, the equity section of the consolidated statement of financial position will contain the share capital and share premium of the parent only. It may also be necessary to ascertain the correct balance on https://business-accounting.net/florida-tax-rates-rankings-florida-taxes/ the retained earnings. This will include the parent’s retained earnings and the group’s share of the post-acquisition profits of the subsidiary. The post-acquisition profits of the subsidiary will be shared between the parent (in the group retained earnings) and non-controlling interest (NCI) in the proportion that they share profits and losses.

Exam results

Answer A completely omits the elimination of the intra-group balances and answer B does not cancel the corresponding payable within liabilities. Answer

From the question, we can see that Pink Co has control over Scarlett Co. This should mean that you immediately consider adding together 100% of Pink Co’s balances and Scarlett Co’s balances to reflect control. Answer

Let’s consider each of the investments in turn to determine if control exists and, therefore, if they should be accounted for as a subsidiary.