In this session on the consolidated statement of financial position we shall look at how we deal with intragroup trading balances and unrealised profits held in inventories.
Effects of intragroup trading on group assets and liabilities
If a parent trades with a subsidiary (i.e. buying or selling goods or services) the companies’ trade receivables and trade payables at the financial period-end may include balances owed to/from each other. It is also possible that one group company might hold inventories at the period-end that were acquired from another group company.
As a consequence, when the consolidated statement of financial position is prepared, we must ensure that:
- Trade & Other Receivables must exclude any balances owed from group companies
- Trade & Other Payables must exclude any balances owed to group companies
- Inventories must be reduced by the value of any unrealised profits included in their cost
Effects of intragroup trading on group equity
If the calculation of the group’s inventory includes a reduction for unrealised profits there will be a corresponding reduction in the group’s equity. The way that equity would be reduced depends on whether the relevant inventories are held by the parent or subsidiary company at the period-end.
Where the inventories that include unrealised profits are held by the subsidiary
Where the inventories that include unrealised profits are held by the subsidiary at the period-end we will deduct all these unrealised profits from the group’s retained earnings.
Where the inventories that include unrealised profits are held by the parent
Where the inventories that include unrealised profits are held by the parent at the period-end:
- Deduct the parent’s share of the unrealised profits from the group’s retained earnings
- Deduct the non-controlling interest’s share of the unrealised profits from the Non-Controlling Interest
Note: Examiners tend to use scenarios where inventories including an amount of unrealised profit are held by the parent company rather than the subsidiary
Question 1
A parent company owns 75% of its subsidiary.
During the last financial year, a subsidiary sold goods that cost £6,000 to its parent company for £15,000. At the end of the year, the parent company still held a third of these goods in its inventory.
a) Calculate the unrealised profits held in the parent’s inventory
b) Calculate the adjustment that will be made in respect of these unrealised profits to the retained earnings in the consolidated statement of financial position
c) Calculate the adjustment that will be made in respect of these unrealised profits to the non-controlling interests in the consolidated statement of financial position
Click here to reveal the answer
a) The unrealised profits in inventory are £3,000.
This has been calculated as the profit on the sale of £9,000 (i.e. £15,000 less £6,000) multiplied by the portion of the goods still in inventory at the year-end (i.e. 1/3rd)
b) The adjustment to the retained earnings will be the parent’s share of the unrealised profits calculated in (a). £3,000 x 75% = £2,250 (this will be deducted from the group’s retained earnings)
c) The adjustment to the non-controlling interests will be the non-controlling interests’ share of the unrealised profits calculated in (a) £3,000 x 25% = £750 (which will be deducted from the non-controlling interests)
Question 2
At its year-end a parent company is owed £746,387 by its customers and owes £402,642 to its suppliers. At the same date its subsidiary is owed £99,645 by its customers and owes £103,687 to its suppliers. These balances include £15,455 that was owed by the parent to its subsidiary.
a) Calculate the value of the group’s trade receivables?
b) Calculate the value of the group’s trade payables?
Click here to reveal the answer
a) The group’s trade receivables are £830,577 (i.e. £746,387 + £99,645 – £15,455)
b) The group’s trade payables are £490,874 (i.e. £402,642 + £103,687 – £15,455)
Illustration
Romulus Ltd purchased 90% of the share capital of Remus Ltd for £850,000 on 01/01/2020. On that day Remus Ltd had share capital of £200,000 and retailed earnings of £500,000.
During the year ended 31/12/2020 Remus Ltd sold goods costing £50,000 to Romulus Ltd for £125,000 (making a profit on the sale of £75,000). At the year-end Romulus Ltd still held £100,000 of these goods in its inventories.
At the year-end there were intercompany balances outstanding of £40,000 which arose from the above mentioned goods sold by Remus Ltd to Romulus Ltd.
The companies’ statements of financial position as at 31/12/2020 are show below.
Group assets: non-current assets
The group’s property, plant and equipment will be calculated by adding the figures of parent and subsidiary together.
The investment made in the shares of Remus Ltd by Romulus Ltd will not be included in the consolidated statement.
Goodwill will be included in the consolidated statement. Its calculation is as follows:
Group assets: current assets
The group’s inventories will be calculated by adding the value of both companies’ inventories together and then deducting the unrealised profits held in those inventories. To calculate the unrealised profits we will take the profit on the intragroup sales (i.e. £75,000) and multiply this amount by the portion of the goods sold that remain in inventory at the year end (i.e. £100,000/£125,000, or 4/5ths).
The group’s Trade and Other Receivables will be calculated by adding the parent and subsidiaries’ figures together and then deduct the intragroup balance.
The group’s cash balances will simply be calculated by adding the parent and subsidiary’s figures together.
Group liabilities
The group’s Trade and Other Payables will be calculated in a similar way to the Trade and Other Receivables. We will add the parent and subsidiary’s figures together and then deduct the intragroup balance.
The group’s Taxation and Debenture liabilities are calculated by adding the parent and subsidiary’s figures together. We can now complete the top half of the Consolidated Statement of Financial Position.
Group equity: share capital
The group’s share capital is always the same as the parent’s share capital; i.e. £1,000,000.
Group equity: retained earnings
The group’s equity will include the following:
- The parent’s retained earnings at the year-end
- Add the parent’s share of the subsidiary’s post-acquisition retained earnings
- Less the parent’s share of the unrealised profit on inventory
The calculation is shown below.
Group equity: non-controlling interests
The group’s non-controlling interests will be calculated by taking the share of the subsidiary’s share capital and reserves that are not owned by the parent and then deducting the subsidiary’s share of unrealised profits on inventory.
The calculation for this scenario is shown below.
Note: The NCI calculation can be completed in a number of different orders. For example, we could calculate the total of Remus Ltd’s equity; i.e. £770,000 and then deduct the total unrealised profit in inventory of £60,000 to give £710,000 which we would then multiply by 10% to give £71,000
The equity section of the statement can now be completed.
The consolidated statement of financial position is now complete.
Question 3
On 01/07/2019 the Parent purchased 60% of the share capital of the Subsidiary for £500,000. On the acquisition date, the Subsidiary had share capital of £50,000 and retained earnings of £480,000.
During the year, the Subsidiary sold goods that cost it £50,000 to the Parent for £150,000. Of these goods, the Parent still held £120,000 in inventory at the year-end. At the year-end the Parent owed the Subsidiary £150,000 in respect of these goods.
The companies’ statements of financial position for the year ended 30/06/2019 are shown below.
Prepare the consolidated statement of financial position for the year ended 30/06/2020.
Click here to go to the answer
