F1 6.04 The Consolidated Statement of Profit or Loss: Part 1 General Approach

In this session we shall illustrate the general approach used when preparing a consolidated statement of profit or loss.

When doing so we shall use examples where there is a parent company and a single subsidiary company that was controlled throughout the financial period. In addition both parent and subsidiary companies used the same accounting policies and have the same financial period-end.

General approach

The general approach when consolidating the Statement of Profit or Loss is to take statements of the parent and subsidiary and combine them (i.e. add them together) on a line-by-line basis; so

• The parent and subsidiaries’ income will be added together
• The parent and subsidiaries’ expenses will be added together

The group’s profit or loss will be calculated using the group’s income and expenses (you must not calculate these by combining the parent and subsidiary’s profits).

Note: adjustments to the group’s figures will be required if the parent and subsidiary have traded and/or conducted other transactions with each other.

Illustration

In this illustration we shall look at the most simple scenario. The parent owns all the subsidiary’s shares and there have been no intragroup transactions.

Our template for the consolidated statement of profit or loss is shown below.

The Consolidated Statement of Profit or Loss looks very similar to a single company’s Statement of Profit or Loss but note the following:

1. The statement is prepared in the name of the parent company
2. The statement includes the word “consolidated” so that any user will understand that it represents the group’s figures
3. If the parent company doesn’t own all of the subsidiary an additional section will be included at the end of the statement. This will record how the Profit (or Loss) for the Period is split between the owners of the parent company and the non-controlling interest in the subsidiary

The income and expenses lines can now be combined (i.e. added together).

Lastly, the profit lines of the statement can be calculated. Remember that these are to be calculated using the income and expenses recorded in the consolidated statement.

The consolidated statement is now complete.

6.04 Question 1

A Ltd had owned the whole share capital of B Ltd throughout their financial year. Their Statements of Profit or Loss for the year ended 30/11/2020 are shown below.

Prepare A Ltd’s consolidated statement of profit or loss for the year ended 30/11/2020.

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In later sessions

In later sessions of this section of the course we shall look at how the general approach is amended for:

• Intragroup trading (i.e. goods or services being sold/bought between parent and subsidiary)
• Inventories purchased from other group companies still being held in inventories at the end of the financial period
• Interest paid/received on intragroup loans
• Dividends paid to the parent company by the subsidiary
• Non-controlling interests in the subsidiary