In this session we shall start to look at how the consolidated statement of financial position is prepared for a group. We shall consider the general approach to calculating group assets and liabilities as well as equity and non-controlling interests and illustrate this with a simple scenario.
General Approach: Assets & Liabilities
Most assets and liabilities in the consolidated statement of financial position are calculated by combining the statements of the parent and subsidiary on a line-by-line basis and then eliminating intragroup balances.
There are however some exceptions:
- The consolidated statement will not include the investment made in the shares of the subsidiary by the parent (since a group cannot own itself)
- The consolidated statement will however, include the value of goodwill in the subsidiary
- At the date of acquisition, the subsidiary’s assets and liabilities will be valued and recorded at their fair value rather than their carrying value. In many cases the fair and carrying values will be the same but this is not always the case (e.g. the fair value of assets such as land and buildings are often greater from their carrying value).
General Approach: Equity
The general approach to preparing the group’s equity is different to the approach for assets and liabilities.
- The group’s share capital is always the same as as the share capital of the parent
- The group’s retained earnings will include:
- The retained earnings of the parent
- The parent’s share of the subsidiaries’ post-acquisition retained earnings (i.e. the retained earnings since it became a subsidiary)
- There will also be further adjustments for the parent’s share of unrealised profits on inventories as well as goodwill impairments or bargain purchases
- The group’s non-controlling interests will include:
- The non-controlling interests’ shares of the subsidiary’s share capital and reserves at the period end
- The non-controlling interest’s share of adjustments caused by valuing assets or liabilities at their fair, rather than carrying values
- A reduction for the non-controlling interest’s share of unrealised profits on inventories
- The group’s other reserves will include:
- The parent’s other reserves
- The parent’s share of the subsidiary’s post-acquisition reserves
We shall start by consolidating a relatively straightforward example and then, over the next few sessions will add various complexities to illustrate how the Consolidated Statement of Financial Position is prepared. In all of the examples we shall be dealing with a group with a parent and one subsidiary who have the same year-end and have used the same accounting policies when preparing their own financial statements.
Thetis Ltd purchased 80% of the share capital of Ariadne Ltd for £500,000 on 01/01/2020. On the date of acquisition Ariadne Ltd had equity of £450,000 split between share capital of £100,000 and retained earnings of £350,000.
The two companies’ statements of financial position as at 31/12/2020 are shown below.
Group assets: non-current assets
We will begin by considering the group’s non-current assets. The property, plant and equipment will simply be the parent and subsidiary’s figures added together (i.e. £6,260,000 + £630,000).
The investment in the subsidiary should not be included in the consolidated statement but we should include any goodwill. The calculation of goodwill is shown below. Note that we are given Ariadne Ltd’s share capital and reserves at the date of acquisition and the accounting equation tells us that these together will equal the same value as the company’s Net Assets.
Group assets: current assets
As there have been no transactions between the group companies and are provided with no additional information, we can simply add the figures for the parent to those of the subsidiary.
As there have been no transactions between the group companies and are provided with no additional information, we can calculate both the group’s current liabilities and its non-current liabilities by adding the parent’s figures to those of the subsidiary.
The top part of the consolidated statement of financial position is shown below.
Group equity: share capital
The group’s share capital will be the same as the parent’s share capital; i.e. £1,000,000.
Group equity: retained earnings
The group’s retained earnings will be calculated as those of the parent company (i.e. £3,590,000) plus the parent company’s share of the subsidiary’s post-acquisition retained earnings.
The share of post-acquisition retained earnings can be calculated by taking the parent’s share (i.e. 80%) of subsidiary’s year-end retained earnings of £410,000 and deducting the parent’s share of retained earnings at the date of acquisition (i.e. £350,000). The calculation is shown below.
[Note: many accountants will combine lines 2 and 3 of the above table into a single calculation; i.e. the parent’s share of the subsidiary’s post-acquisition retained earnings are (328-280) x 80% = 48]
Group equity: non-controlling interest
The non-controlling interest for this example will simply be the share of the subsidiary’s share capital and reserves that are not owned by the parent company (in this case, 20%). The calculation is shown below.
Finally, the above figures can be recorded in the equity section.
The consolidated statement is now complete.
On 01/10/2019, the Parent purchased all the share capital of the Subsidiary for £1,000,000. On the acquisition date, the Subsidiary had share capital of £200,000 and retained earnings of £510,000 (this means that the Subsidiary’s net assets at the acquisition date must have been £710,000).
The two companies’ statements of financial position for the year ended 30/06/2020 are shown below.
a) Calculate the goodwill to be included in the consolidated statement of financial position
b) Calculate the retained earnings to be included in the consolidated statement of financial position
c) Prepare the consolidated statement of financial position