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Consolidated Accounts (Group Accounts)
These notes are for those studying financial accounting and reporting at an introductory level.
All initial examples will include the preparation of Consolidated Balance Sheets of the holding company (parent)plus a subsidiary or subsidiaries. A simple group Income Statement will also be prepared. The ‘acquisition’
method of consolidation will be used.
As far as the balance sheet is concerned we will examine:
i) The cancellation processes that are required for the acquisition method of consolidation including inter-
company trading.
ii) Part cancellation, where the holding company may buy the `goodwill` of the subsidiary, where less
than 100% of the subsidiary voting shares have been acquired, which raises the issue of the non-controlling (minority interest) shareholders.
Rationale for Group Accounting
There are many reasons why one company (a parent undertaking) might wish to acquire control of another (a
subsidiary undertaking). These might include commercial objectives such as to gain access to market share,to curtail competition, to acquire new products or services, acquire new resources such as fixed assets,
research and development assets, to acquire the services of skilled staff, to gain access to finance, for
taxation reasons or to diversify risk. There have, though, been notable examples of `asset stripping`
whereby an acquired company is subsequently dismantled and its assets sold.
An acquisition strategy can represent a speedier means of achieving expansion than traditional `internaldevelopment` methods. This can often be `cost-effective` - particularly where a parent undertaking has
sufficient ̀ strength` within its balance sheet to effect a purchase of a subsidiary undertaking by issuing its own
new shares to the subsidiary’s shareholders as a form of consideration
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new shares to the subsidiary s shareholders as a form of consideration
Content of Group accounts
It is important to understand that group accounts are a combination of the accounts of all those entities withinthe group. The individual units are separate legal entities, but the group has no separate legal existence - it
exists for accounting purposes. There is no obligation of a parent undertaking, for example, for the solvency orotherwise of a subsidiary, unless specific guarantees are given to that effect.
In the UK, the Companies Acts require group accounts to be prepared where a company is a parentundertaking at the end of its financial year and where it is not itself a wholly owned subsidiary undertaking of
another UK incorporated company. The preparation of the group accounts is also governed by International
Accounting Standards, particularly:
IAS 1 Presentation of Financial Statement
IFRS 3 Business Combinations
IAS 27 Consolidation and Separate Financial Statements
IAS 28 Investments in Associates, and
IAS 31 Interests in joint ventures.
It is not necessary for you, at this stage, to understand the full requirements of all the regulatory framework.
The detailed regulations change from t ime to time as IFRSs and IASs are updated, but for the time being it is
sufficient to be aware of the following:
IAS 27 sets out the various definitions for Parent, Subsidiary and Control. It indicates that when preparing groupaccounts, where possible the same accounting dates should be used. It is also important that commonaccounting policies (as per all IFRSs and IASs) are applied for all parties to the consolidation. Intra-group
transactions are eliminated from the process.
IFRS 3, which has recently (2008) been revised, is a major standard to consider when preparing group
accounts. It is vital that all transactions are recorded at fair value (which is the amount by which an asset or
liability is valued by knowledgeable willing parties in an arm’s length transaction) A recent innovation herehas
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Basic Consolidated Accounting Procedures
Case 1: It is 31 March 19X4 and Hold plc has just acquired 100% of the Ordinary Shares of Sub Ltd for £70,000. On the date of the acquisition the net assets of Sub Ltd
were £70,000 and the accounts of the two companies were as follows: You should also assume that the current assets of Hold Ltd include £14,000 due from Sub Ltd andthat the Current Liabilities of Sub Ltd include £14,000 owing to Hold Ltd. The consolidated (group) position is as follows;
Balance Sheets of Hold plc and its Subsidiary as at 31 March 19X4
Hold plc Sub Ltd Group Note
£000 £000 £000 £000 £000 £000
Fixed Assets 100 50 150 1
Investment in Sub Ltd at cost 70* 2170 50
Current Assets 90 50 126 3
Current Liabilities (100) (20) (106) 4
Net current assets \ (liabilities) (10) 30 20
160 80 170
Long Term Loans (20) (10) (30) 5
Net Assets £140 £70 £140
Ordinary Share Capital 100 50* 100 6
Retained Profits 40 20* 40 7
Shareholders Capital Employed £140 £70 £140
* Note that in this example the Investment by Hold in Sub exactly equals the book value of Sub’s shares and reserves at acquisition. The first rule of group accounts is that,on consolidation, equal and opposites, (marked * above) are cancelled out. Other balance sheet items are combined but the inter-company balances, are removed from
the Consolidated Balance Sheet. Note also that you will never see the information in the above format in group accounts. The cases are presented in this manner
for learning purposes only.
Notes: Notes Continued:
1 £100 + £50 = £150 6 Hold only (always the case). Shares of Sub, £50, are cancelled out
2 Cancelled out, £0 7 Hold only (in this case). Reserves of Sub, as existed at acquisition date, £20, are cancelled out.3 £90 + £50 - £14 = £126
4 £100 + £20 - £14 = £106
5 £20 + £10 = £30
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Case 2: It is 31 March 19X4 and Hold plc has just acquired 100% of the Ordinary Shares of Sub Ltd for £85,000. On the date of the acquisition the accounts of the two
companies and the consolidated position were as follows.Balance Sheets of Hold plc and its Subsidiary as at 31 March 19X4
Hold plc Sub Ltd Group
£000 £000 £000 £000 £000 £000
Fixed Assets 100 50 150 Investment in Sub at cost 85*
185 50Goodwill on acquisition 15
Current Assets 90 50 140
Current Liabilities (100) (20) (120)
Net current assets \ (liabilities) (10) 30 20
175 80 185
Long Term Loans (20) (10) (30)
Net Assets £155 £70 £155
Financed By:
Ordinary Share Capital 100 50* 100
Retained Profits 55 20* 55
Shareholders Capital Employed £155 £70 £155
* Note that in this example the Investment by Hold in Sub is £15 larger than the book value of Sub’s shares and reserves (net assets) at acquisition. This means that Holdhas paid £15,000 more than the fair value of the net assets of Sub Ltd. It has purchased ‘Goodwill’. This is known as ‘Goodwill on acquisition’. Note that in this case thereare no inter-company debtors and creditors. It is normal for businesses to write off (amortise) the goodwill acquired over a number of years. For the time being, though, wewill continue to carry goodwill in consolidated balance sheets at its original acquisition value.
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Case 3: It is 31 March 19X4 and Hold plc has just acquired 100% of the Ordinary Shares of Sub Ltd for £60. On the date of the acquisition the accounts of the two
companies and the consolidated position were as follows. All amounts are in £000:
Balance Sheets of Hold plc and its Subsidiary as at 31 March 19X4
Hold plc Sub Ltd Group Note
£000 £000 £000 £000 £000 £000 Fixed Assets 100 50 150
Investment in Sub at cost 60* .160 50 150
Current Assets 115 50 165
Current Liabilities (100) (20) (120)
Net current assets 15 30 45
175 80 195
Long Term Loans (20) (10) (30)
Net Assets £155 £70 £165
Financed By:
Ordinary Share Capital 100 50* 100 Retained Profits 55 20* 65 1
Shareholders Capital Employed £155 £70 £165
* Note that in this example the Investment by Hold in Sub is £10 smaller than the book value of Sub’s shares and reserves at acquisition. This creates negative goodwillarising on consolidation. Note again that in this case there are no inter-company debtors and creditors.
Note:1. The treatment of negative goodwill is tricky, but it cannot be shown as a ‘negative asset’. Instead the £10 has to berecognised in the group retained profits.
£55 + £10 = £65
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Case 4: Let us now assume that Hold had paid £85 for 60% of the Shares and reserves (net assets) of Sub Ltd instead of 100%. On the date of the acquisition the
accounts of the two companies and the consolidated position were as follows. All amounts are in £000:
Balance Sheets of Hold plc and its Subsidiary as at 31 March 19X4Hold plc Sub Ltd Group
£000 £000 £000 £000 £000 £000
Fixed Assets 100 50 150Investment in Sub at cost 85*
185 50Goodwill on acquisition 43
Current Assets 90 50 140
Current Liabilities (100) (20) (120)
Net current assets \ (liabilities) (10) 30 20
175 80 213
Long Term Loans (20) (10) (30)
Net Assets £155 £70 £183
Financed By:
Ordinary Share Capital 100 50* 100 Retained Profits 55 20* 55
Non-Controlling Interests of Sub Ltd 28
Shareholders Capital Employed £155 £70 £183
* Note that in this example the Investment by Hold in Sub is £43 larger than the book value of Sub’s shares and reserves at acquisition. This is because the £85investment now purchases (60% x £70 = £42) of Sub’s shares and reserves (or net assets). The remaining 40% of the shares and reserves of Sub Ltd belong to theNon- Controlling Interest (Minority Interest) Shareholders of Sub Ltd. At Balance Sheet date, the Non-Controlling (Minority) Interests in Sub Ltd are shown in the
Consolidated Balance Sheet as (40% x £70 = £28). When calculation the non-controlling interest you should always start with the latest balance sheet figures for
the Shares and Reserves of each subsidiary. You then apply the ‘non-group shareholding percentage to this figure. The above presentation indicates that £28,000
of the subsidiary’s net assets are financed by outside (non group) shareholders, that is, Non-Controlling Interest Shareholders.
Now attempt the following simple case:
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Case 5: Draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9
H plc S Ltd£000 £000 £000 £000
Fixed assets 18 100Investment by H in S 100
Current Assets 20 30Current Liabilities (10) (20)Net current assets 10 10
128 110Long Term Loans (28) (10)
£100 £100
Ordinary Share Capital £1 Shares 80 50Profit and Loss Reserve 20 50
£100 £100
H acquired 80% of S Ltd’s net assets when S’s shares stood at £50 and its profit and loss reserve at £50. Amounts are in £000's
Any positive Goodwill is carried in the balance sheet, negative goodwill is transferred to the group profit and loss reserves.
Required: Prepare the group balance sheet as at 31 December 20X9
Use the pro-forma overleaf:
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Consolidated balance sheet of H plc and its subsidiary S Ltd as at 31 December 20X9
H plc S Ltd Group Note
£000 £000 £000 £000 £000 £000 £000
Fixed assets 18 100
Investment by H in S 100Goodwill on acquisitionCurrent Assets 20 30Current Liabilities (10) (20)Net current assets 10 10
128 110Long Term Loans (28) (10)
£100 £100
Ordinary Share Capital £1 Shares 80 50Profit and Loss Reserve 20 50
£100 £100
Non-Controlling Interests
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Consolidated balance sheet of H plc and its subsidiary S Ltd as at 31 December 20X9
H plc S Ltd Group Note
£000 £000 £000 £000 £000 £000
Fixed assets 18 100 118 1Investment by H in S 100Goodwill on acquisition 20 2
Current Assets 20 30 50 3
Current Liabilities (10) (20) (30) 4
Net current assets 10 10 20
128 110 158
Long Term Loans (28) (10) (38) 5
£100 £100 £120
Ordinary Share Capital £1 Shares 80 50 80 6
Profit and Loss Reserve 20 50 20 7
£100 £100 100 Non-Controlling Interests 20 8
£120
Notes
1 H + S = £18 + £100 = £118
2 £100 paid to acquire 80% x (£50 + £50) = £100 paid to acquire £80 = £20 Goodwill
3 H + S = £20 + £30 = £50
4 H + S = £10 + £20 = £30
5 H + S = £28 + £10 = £38
6 H only, £80
7 H + 100% of S post acquisition = £20 + £0 = £20
8 20% x £100 = £20
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We will now consider what happens in the consolidation process where the subsidiary increases its profit and loss reserve in the period beyond acquisition date by the
Parent. Consider the following example.
Case 6: Draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9
H plc S Ltd
£000 £000 £000 £000Fixed assets 18 100Investment by H in S 100Current Assets 20 30Current Liabilities (10) (20)Net current assets 10 10
128 110Long Term Loans (28) (10)
£100 £100
80 50Profit and Loss Reserve 20 50*
£100 £100
H acquired 80% of S Ltd’s net assets for £100,000 some time ago when S’s shares stood at £50,000 and its profit and loss reserve at £40,000
Any positive Goodwill is carried in the balance sheet, negative goodwill is transferred to the group profit and loss reserves.
Required: Prepare the group balance sheet as at 31 December 20X9
NB in this case the profit and loss reserve at acquisition date was £40. By consolidation date this has increased to £50*
The impact of this small change to the case requires care with:
the goodwill calculation and
a revised treatment for the consolidated reserves in the balance sheet.
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Goodwill Calculation £000
In this case, H has paid 100
For 80% of (£50 + £40) = 80% x £90 = 72Goodwill on acquisition £28
Consolidated Reserves
The rule to apply for group reserves is that the consolidated figure includes all H’s reserves plus H’s share of any reserves of S Ltd which have been earned SINCE
acquisition. That means that the slightly more complete rule for calculating consolidated reserves is:
Holding Company (H), plus H’s share of Subsidiary post acquisition profits.
Post acquisition profits
As indicated above, these are the profits earned by S since acquisition. The quickest way to establish post acquisition profits of S is to locate the very latest profit and lossreserve figure at consolidation date (latest balance sheet) and then deduct the profit and loss reserve which existed at acquisition date. The technical term for the profit and
loss reserve which exists at acquisition date is pre-acquisition profits.
In the above example, post acquisition profits are £50 – £40 = £10.
H’s share of S’s post acquisition profits is 80% x £10 = £8
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Consolidated balance sheet of H plc and its subsidiary S Ltd as at 31 December 20X9
H plc S Ltd Group Note
£000 £000 £000 £000 £000 £000
Fixed assets 18 100 118 1
Investment by H in S 100Goodwill on acquisition 28 2
Current Assets 20 30 50 3Current Liabilities (10) (20) (30) 4
Net current assets 10 10 20
128 110 166
Long Term Loans (28) (10) (38) 5
£100 £100 £128
Ordinary Share Capital £1 Shares 80 50 80 6
Profit and Loss Reserve 20 50 28 7
£100 £100 108
Non-Controlling Interests 20 8
£128
Notes
1 H + S = £18 + £100 = £118
2 £100 paid to acquire 80% x (£50 + £40) = £100 paid to acquire £72 = £28 Goodwill
3 H + S = £20 + £30 = £50
4 H + S = £10 + £20 = £30
5 H + S = £28 + £10 = £38
6 H only, £80
7 H + 80% of S post acquisition = £20 + 80% x (£50 - £40) = £20 + £8 = £28
8 20% x £100 = £20
Now consider another case.
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Case 7: Draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9
H plc S Ltd
£000 £000 £000 £000
Fixed assets 267 200Investment by H in S 51Current Assets 120 140Current Liabilities (90) (60)
Net current assets 30 80348 280
Long Term Loans (48) (180)£300 £100
Ordinary Share Capital £1 Shares 180 50Profit and Loss Reserve 120 50*
£300 £100
H acquired 60% of S Ltd’s net assets for £51,000 one year ago when S’s shares stood at £50,000 and its profit and loss reserve at £10,000
The current assets of H include £35,000 owing from S and the current liabilities of S include £35,000 owing to H.
Any positive Goodwill ar ising on consolidation is amortised over its useful life, in this case considered to be f ive years. Negative goodwill, if any, is transferred to group profitand loss reserves.
Required: Prepare the group balance sheet as at 31 December 20X9
NB In this case you will find that Goodwill on acquisition calculates at £15,000. Amortising (writing off) over 5 years means an annual goodwill amortisation amount of
£3,000. The impact of this transaction on group accounts would be to reduce the balance sheet figure for goodwill from £15,000 to £12,000 and also group reserves will
be reduced by £3,000 to reflect the amortisation of goodwill which would have been charged as an expense in the income statement.
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Draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9
H plc S Ltd Group
£000 £000 £000 £000 £000 £000 Note
Fixed Assets 267 200 467 1
Investment by H in S 51
Goodwill on Consolidation 12 2
318 479 Current Assets 120 140 225 3
Current Liabilities 90 60 115 4
30 80 110
348 280 589
Long Term Loans 48 180 228 5
300 100 361
Ordinary Share Capital £1 Shares 180 50 180 6
Profit and Loss Reserve 120 50 141 7
Non-Controlling Interests 40 8
300 100 361
Notes:
1 H + S = £267 + £200 = £467
2 For an acquisition costing 51H acquired 60% of S, 60% x £60 = 36Goodwill acquired 15 amortised over 5 years = £3 per annumAmortised for 1 year 3Carrying value in Group balance sheet £12
3 H + S – Inter-Company = £120 + £140 - £35 = £225
4 H + S – Inter-Company = £90 + £60 - £35 = £115
5 H + S = £48 + £180 = £228 6 H only £180
7 H + 60% x post acquisition profit of S minus 1 year’s amortization = £120 + (60% x (£50 - £10) - £3 = £120 + £24 - £3 = £141
8 40% x Shareholders funds of S = 40% x £100 = £40
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Now consider a very small change to the case 7 scenario. Acquisition of S by H is now TWO years ago.
Case 8: Draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9
H plc S Ltd
£000 £000 £000 £000
Fixed assets 267 200Investment by H in S 51
Current Assets 120 140Current Liabilities (90) (60)Net current assets 30 80
348 280Long Term Loans (48) (180)
£300 £100
Ordinary Share Capital £1 Shares 180 50Profit and Loss Reserve 120 50*
£300 £100
H acquired 60% of S Ltd’s net assets for £51,000 two years ago when S’s shares stood at £50,000 and its profit and loss reserve at £10,000
The current assets of H include £35,000 owing from S and the current liabilities of S include £35,000 owing to H.
Any positive Goodwill arising on consolidation is amortised over its useful life, in this case considered to be five years. Negative goodwill, if any, is transferred to group profitand loss reserves.
Required: Prepare the group balance sheet as at 31 December 20X9
NB As with case 7 you will find that Goodwill on acquisition calculates at £15,000. Amortising (writing off) over 5 years means an annual goodwill amortisation amount of
£3,000. But acquisition was two years ago which means that the group accounts will have reflected two years of amortisation of goodwill. The impact of this transaction on
group accounts would be to reduce the balance sheet figure for goodwill from £15,000 to £9,000 and also group reserves will be reduced by £6,000 to reflect the
amortisation of goodwill which would have been charged as an expense in the income statement for two years.
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Draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9
H plc S Ltd Group
£000 £000 £000 £000 £000 £000 Note
Fixed Assets 267 200 467 1
Investment by H in S 51
Goodwill on Consolidation 9 2
318 476 Current Assets 120 140 225 3
Current Liabilities 90 60 115 4
30 80 110
348 280 586
Long Term Loans 48 180 228 5
300 100 358
Ordinary Share Capital £1 Shares 180 50 180 6
Profit and Loss Reserve 120 50 138 7
Non-Controlling Interests 40 8
300 100 358
Notes:
3 H + S = £267 + £200 = £467
4 For an acquisition costing 51H acquired 60% of S, 60% x £60 = 36Goodwill acquired 15 amortised over 5 years = £3 per annumAmortised for 2 years 6Carrying value in Group balance sheet £9
3 H + S – Inter-Company = £120 + £140 - £35 = £225
4 H + S – Inter-Company = £90 + £60 - £35 = £115
5 H + S = £48 + £180 = £228 6 H only £180
7 H + 60% x post acquisition profit of S minus 2 year’s amortization = £120 + (60% x (£50 - £10) - £6 = £120 + £24 - £6 = £138
8 40% x Shareholders funds of S = 40% x £100 = £40
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Finally please attempt the final balance sheet case (number 9) for yourselves:
Case 9: Draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9
H plc S Ltd
£000 £000 £000 £000
Fixed assets 263 200Investment by H in S 55
Current Assets 120 140Current Liabilities (90) (60)Net current assets 30 80
348 280Long Term Loans (48) (180)
£300 £100
Ordinary Share Capital £1 Shares 180 50Profit and Loss Reserve 120 50*
£300 £100
H acquired 75% of S Ltd’s net assets for £55,000 two years ago when S’s shares stood at £50,000 and its profit and loss reserve at £10,000
The current assets of H include £26,000 owing from S and the current liabilities of S include £26,000 owing to H.
Any positive Goodwill arising on consolidation is amortised over its useful life, in this case considered to be ten years. Negative goodwill, if any, is transferred to group profitand loss reserves.
Required: Prepare the group balance sheet as at 31 December 20X9
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Draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9
H plc S Ltd Group
£000 £000 £000 £000 £000 £000 Note
Fixed Assets 263 200 463 1
Investment by H in S 55
Goodwill on Consolidation 8 2
318 471
Current Assets 120 140 234 3
Current Liabilities 90 60 124 4
30 80 110
348 280 581
Long Term Loans 48 180 228 5
300 100 353
Ordinary Share Capital £1 Shares 180 50 180 6
Profit and Loss Reserve 120 50 148 7
Non-Controlling Interests 25 8
300 100 353
Notes:
5 H + S = £263 + £200 = £463
6 For an acquisition costing 55H acquired 75% of S, 75% x £60 = 45Goodwill acquired 10 amortised over 10 years = £1 per annumAmortised for 2 years 2Carrying value in Group balance sheet £8
3 H + S – Inter-Company = £120 + £140 - £26 = £234
4 H + S – Inter-Company = £90 + £60 - £26 = £124
5 H + S = £48 + £180 = £228
6 H only £180 7 H + 75% x post acquisition profit of S minus 2 year’s amortisation =
£120 + (75% x (£50 - £10) - £2 = £120 + £30 - £2 = £148
8 25% x Shareholders funds of S = 25% x £100 = £25
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The Consolidated Income Statement
In this section we need to be aware of some transaction which might well happen between companies within a group. At this basic level we will consider just two items:
Inter-company sales \ purchases Dividends
Inter-company (IC) Sales and Purchases
Where the Holding Company Sells to the Subsidiary (or vice versa) the transaction might (or might not) be done at a ‘profit’ to the selling company. For group Income
Statement purposes inter-company sales and purchases are ignored for purposes of group sales and group purchases. Remember if S sells goods worth £10 then H buys
goods worth £10.
If, however, any stocks are in hand at the end of the year which emanate from inter-company transactions, then if there is any profit within those stocks then the profit
would have to be eliminated from group stock figures. Such transactions will not feature in these notes.
Any outstanding amounts at the year end in respect of inter-company debtors and creditors are dealt with in the balance sheet as you have already seen.
Dividends
As we have already seen the Holding Company is entitled to its share of any dividends paid by the Subsidiary companies. When it comes to dealing with dividends receivedwithin the group income statement we must only incorporate dividends received from outside the group. Hence the dividend received by H from S is not included in the
group accounts.
In terms of Dividends payable, the rule to adopt is that we include Dividends paid by the parent only.
Other Items within the Group Income Statement:
There will be an extra operating cost in respect of the amortisation of goodwill in subsidiaries. There is also the matter of profit attributable to Non-controlling (Minority)
Interests.
Non-Controlling (Minority) Interests
These stakeholders are entitled to the non-group percentage of profits after taxation of each subsidiary. So if the Parent holds 80% of the subsidiary shares and theSubsidiary earns £45,000 after tax, then the Non-controlling shareholders are entitled to 20% x £45,000 = £9,000 of the after-tax profit. This is shown as a deductionfrom
group profit after tax.
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Consolidation Rules
At a basic level there are a small number of rules which, if applied consistently will enable you to produce a simple consolidated income statement.
Item Consolidation treatment
Sales H + S minus any inter-company (IC) sales. Assume that there are no stocks from inter-company sales at the year end.
Cost of Sales H + S minus any inter-company (IC) purchases
Operat ing expenses H + SAmortisation of goodwill in Subsidiary As calculated for annual amortisat ion undertaken in group balance sheet
Financing Costs H + S
Taxation H + S
Inter-company dividend received by H Ignore
Non-Controlling Interest (Minority Interest) Profit after tax of Subsidiary x non-group shareholding percentage. This is deducted from the group income statement.
Ordinary Dividend paid H only
Retained Profit Brought Forward H + H’s share of S Post-acquisition retained profit brought forward, minus goodwill amortised to date
Retained Profit Carried Forward H + H’s share of S Post-acquisition retained profit carried forward, minus goodwill amortised to date
Please Note:
These transactions will be calculated using the internally produced accounts. You will not necessarily see all these figures in the published group accounts.
The information from case 9, above, has been supplemented to provide individual income statement accounts for H and S for the year to 31 December 20X9
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Case 9 continued. The following are the draft Income Statements for H plc and S Ltd for the year ended 31 December 20X9
H plc S Ltd
£000 £000 £000 £000
Sales 350 230
Cost of Sales 210 138
Gross Profit 140 92
Operating Expenses 35 23Amortisation of goodwill in S Ltd
Operating profit 105 69
Financing Costs 5 22
Profit before Tax 100 47
Taxation 20 7
Profit after Tax 80 40
Inter Company Dividends received 3
83
Non Controlling Interests
Group profit for year
Dividends paid 9 4
Retained profit for year 74 36
Retained profit brought forward 46 14
Retained profit carried forward 120 50
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As before, the draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9 are
H plc S Ltd
£000 £000 £000 £000
Fixed assets 263 200Investment by H in S 55Current Assets 120 140Current Liabilities (90) (60)
Net current assets 30 80348 280
Long Term Loans (48) (180)£300 £100
Ordinary Share Capital £1 Shares 180 50Profit and Loss Reserve 120 50
£300 £100
H acquired 75% of S Ltd’s net assets for £55,000 two years ago when S’s shares stood at £50,000 and its profit and loss reserve at £10,000
Inter-company (IC) sales from S Ltd to H plc during the year were £150,000. There were no unsold stocks in relation to these transactions at the year end.The current assets of S include £26,000 owing from H and the current liabilities of H include £26,000 owing to S.
Any positive Goodwill arising on consolidation is amortised over its useful life, in this case considered to be ten years. Negative goodwill, if any, is transferred to group profitand loss reserves.
Required: Prepare the group Income statement for the year ended 31 December 20X9 and a Group balance sheet as at that date.
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Solution: Group Income Statement for H plc and S Ltd for year ended 31 December 20X9
H plc S Ltd Group
£000 £000 £000 £000 £000 £000 Note
Sales 350 230 430 1
Cost of Sales 210 138 198 2
Gross Profit 140 92 232
Operating Expenses 35 23 58 3Amortisation of goodwill in S Ltd 1 59 4
Operating profit 105 69 173
Financing Costs 5 22 27 5
Profit before Tax 100 47 146
Taxation 20 7 27 6
Profit after Tax 80 40 119
Inter Company Dividends received 3 7
83
Non Controlling Interests 10 8
Group profit for year 109
Dividends paid 9 4 9 9
Retained profit for year 74 36 100
Retained profit brought forward 46 14 48 10
Retained profit carried forward 120 50 148 11
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Group Balance Sheet of H plc and S Ltd as at 31 December 20X9
H plc S Ltd Group
£000 £000 £000 £000 £000 £000 Note
Fixed Assets 263 200 463 12
Investment by H in S 55
Goodwill on Consolidation 8 13
318 471 Current Assets 120 140 234 14
Current Liabilities 90 60 124 15
30 80 110
348 280 581
Long Term Loans 48 180 228 16
300 100 353
Ordinary Share Capital £1 Shares 180 50 180 17
Profit and Loss Reserve 120 50 148 11
Non-Controlling Interests 25 18
300 100 353
Notes: £000
1 H + S – IC = £350 + £230 - £150 = £430
2 H + S – IC =£210 + £138 - £150 = £198
3 H + S = £35 + £23 = £58
4 For an acquisition costing 55
H acquired 75% of S, 75% x £60 = 45Goodwill acquired £10
Amortised over 10 years = £1
5 H + S = £5 + £22 = £27
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£000
6 H + S = £20 + £7 = £27
7 From outside group only = £0
8 25% x £40 = £10
9 H plc only £9
10 H 46S, 75% x (£14 - £10) = 75% x £4 3
491 year amortisation 1
£48
11 H 120S, 75% x (£50 - £10) = 75% x £40 30
1502 years amortisation 2
£148
12 H + S = £263 + £200 = £463
13 For an acquisition costing 55H acquired 75% of S, 75% x £60 = 45Goodwill acquired 10 amortised over 10 years = £1 per annumAmortised for 2 years 2Carrying value in Group balance sheet £8
14 H + S – Inter-Company = £120 + £140 - £26 = £234
15 H + S – Inter-Company = £90 + £60 - £26 = £124
16 H + S = £48 + £180 = £228
17 H only £180
18 25% x Shareholders funds of S = 25% x £100 = £25
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Now attempt the final case for this level of study. Case 10
The following are the draft Income and Expenditure accounts of H plc and S Ltd for the period to 31 December 20X9:
H plc S Ltd
£000 £000 £000 £000
Sales 500 300
Cost of Sales 300 180
Gross Profit 200 120
Operating Expenses 50 30
Amortisation of goodwill in S Ltd
Operating profit 150 90
Financing Costs 5 22
Profit before Tax 145 68
Taxation 30 18
Profit after Tax 115 50
Inter Company Dividends received 4
119
Non Controlling Interests
Group profit for year
Dividends paid 50 5
Retained profit for year 69 45
Retained profit brought forward 46 19
Retained profit carried forward 115 64
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The following are the draft Balance Sheets of H plc and S Ltd as at 31 December 20X9:
H plc S Ltd
£000 £000 £000 £000
Fixed Assets 263 264
Investment by H in S 100
Goodwill on Consolidation
363 Current Assets 120 140
Current Liabilities 90 60
30 80
393 344
Long Term Loans 48 180
345 164
Ordinary Share Capital £1 Shares 230 100
Profit and Loss Reserve 115 64
Non-Controlling Interests
345 164
Note:
H acquired 80% of S Ltd’s net assets for £100,000 one year ago when S’s shares stood at £100,000 and its profit and loss reserve at £19,000
Inter-company (IC) sales from S Ltd to H plc during the year were £175,000. There were no unsold stocks in relation to these transactions at the year end.The current assets of S include £32,000 owing from H and the current liabilities of H include £32,000 owing to S.
Any positive Goodwill arising on consolidation is amortised over its useful life, in this case considered to be five years. Negative goodwill, if any, is transferred to group profitand loss reserves.
Required: Prepare the group Income statement for the year ended 31 December 20X9 and a Group balance sheet as at that date.
Please show calculations to the nearest £1,000
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Solution: Group Income and Expenditure accounts of H plc and S Ltd for the period to 31 December 20X9:
H plc S Ltd Group
£000 £000 £000 £000 £000 £000 Note
Sales 500 300 625 1
Cost of Sales 300 180 305 2
Gross Profit 200 120 320
Operating Expenses 50 30 80 3Amortisation of goodwill in S Ltd 1 81 4
Operating profit 150 90 239
Financing Costs 5 22 27 5
Profit before Tax 145 68 212
Taxation 30 18 48 6
Profit after Tax 115 50 164
Inter Company Dividends received 4 7
119
Non Controlling Interests 10 8
Group profit for year 154
Dividends paid 50 5 50 9Retained profit for year 69 45 104
Retained profit brought forward 46 19 46 10
Retained profit carried forward 115 64 150 11
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Group Balance Sheet as at 31 December 20X9
H plc S Ltd Group
£000 £000 £000 £000 £000 £000 Note
Fixed Assets 263 264 527 12
Investment by H in S 100
Goodwill on Consolidation 4 13
363 531 Current Assets 120 140 228 14
Current Liabilities 90 60 118 15
30 80 110
393 344 641
Long Term Loans 48 180 228 16
345 164 413
Ordinary Share Capital £1 Shares 230 100 230 17
Profit and Loss Reserve 115 64 150 11
Non-Controlling Interests 33 18
345 164 413
Notes: £000
1 H + S – IC = £500 + £300 - £175 = £625
2 H + S – IC =£300 + £180 - £175 = £305
3 H + S = £50 + £30 = £80
4 For an acquisition costing 100
H acquired 80% of S, 80% x £119 = 95Goodwill acquired £5
Amortised over 5 years = £1
5 H + S = £5 + £22 = £27
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£000
6 H + S = £30 + £18 = £48
7 From outside group only = £0
8 20% x £50 = £10
9 H plc only £50
10 H 46S, 80% x (£19 - £19) = 80% x £0 0
46No amortisation 0
£46
11 H 115S, 80% x (£64 - £19) = 80% x £45 36
1511 years amortisation 1
£150
12 H + S = £263 + £264 = £527
13 For an acquisition costing 100H acquired 80% of S, 80% x £119 = 95Goodwill acquired 5 amortised over 5 years = £1 per annumAmortised for 1 year 1Carrying value in Group balance sheet £4
14 H + S – Inter-Company = £120 + £140 - £32 = £228
15 H + S – Inter-Company = £90 + £60 - £32 = £118
16 H + S = £48 + £180 = £228
17 H only £230
18 20% x Shareholders funds of S = 20% x £164 = £33
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