F1 6.11 The Consolidated Statement of Financial Position: Part 3

In this session on the consolidated statement of financial position we shall look at the adjustments required for the following:

Where there is a difference between the carrying value of the subsidiary’s assets or liabilities and their fair values at the acquisition date.
Where goodwill at the period-end has been impaired
Where one group company holds debentures in another

1 Effects of a difference between fair and carrying value of net assets of the subsidiary at the acquisition date

Any difference between the fair value of the subsidiary’s assets and liabilities and their carrying values in the subsidiary’s books at the acquisition date must be taken into account when we calculate the value of:

The group’s year-end assets and liabilities
1. If an asset of the subsidiary has a higher fair value than its carrying value at the date of acquisition we shall increase the assets of the group by the difference
2. If a liability of the subsidiary has a higher fair value than its carrying value at the date of acquisition we shall increase the liabilities of the group by the difference
The group’s purchased goodwill
1. When calculating goodwill we should deduct the parent’s share of the fair value of the subsidiary’s net assets at the date of acquisition from the amount paid by the parent for its shares in the subsidiary
The non-controlling interest
1. The non-controlling interest should include their share of the difference between fair and carrying value of net assets at the date of acquisition

[Note. Recording plant, property and equipment at their fair values rather than their carrying values may have an effect on the depreciation that should be recorded in the consolidated accounts (as different amounts will have to be depreciated over the assets’ useful lives). This issue tends to be overlooked in exam questions.]

Question 1
At the date of acquisition of 31/08/2020, a parent company and a subsidiary company’s Property, Plant & Equipment have carrying values of £963,000 and £475,000 respectively.
Included in the subsidiary’s total is a property that cost £160,000 and against which accumulated depreciation of £53,000 had been charged. At the date of acquisition this property has a market value of £325,000.
Calculate the value of Property, Plant & Equipment for the group at the date of acquisition.
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Carrying value of parent’s PPE £963,000
Add carrying value of subsidiary’s PPE £475,000
Less carrying value of property to be valued at its fair value £107,000 (i.e. £160,000-£53,000)
Add market value (i.e. the fair value) of property £325,000
Value of the group’s PPE is £1,656,000

Question 2
At their year-end a parent’s property, plant and equipment has a carrying value of £56.8m. At the same date its subsidiary has a carrying value of £12.4m.
At the date the parent obtained control of the subsidiary, the subsidiary had identifiable net assets with a carrying value of £10.2m but which had a fair value of £11.5m. The difference in value can be attributed to a piece of land owned by the subsidiary.
Calculate the value of Property, Plant & Equipment for the group at the year-end.
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The group’s Property, Plant and Equipment at the year-end should be valued at £70.5m

This is calculated as follows; the total of the carrying values of PPE for both companies of £69.2m (i.e. £56.8m + £12.4m) plus the additional value relating to the subsidiary’s land at the date of acquisition of £1.3m (i.e. £11.5m – £10.2m).

2 Effects of goodwill impairments

The directors will conduct a goodwill impairment review each year. If the goodwill is impaired it will have the following effects on the consolidated statement of financial position.

The impairment loss will be deducted from the value of the purchased goodwill
The impairment loss will also be deducted from the group’s retained earnings

Question 3
On 23rd October 2020, a parent company purchased 70% of the share capital of its subsidiary for £46.3m. At that date the identifiable assets of the subsidiary had a fair value of £82.0m and its liabilities had a fair value of £31.0m. At the two companies’ year-end of 31st January 2021, the directors of the parent company determined that the goodwill in the subsidiary had been impaired by £2.0m.
a) Calculate the value of the goodwill at the acquisition date
b) Calculate the value of the goodwill at the year end
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a) Goodwill at the acquisition date:

Start with the amount paid for the shares of £46.3m
Add the value of the non-controlling interest’s share of the fair value of the subsidiary’s net assets (being the value of its identifiable assets less its liabilities); i.e. 30% x (£82.0m – £31.0m) = £15.3m
Less the fair value of the subsidiary’s net assets; i.e. £82.0m – £31.0m = £51.0m
Goodwill at the acquisition is therefore £56.3m + £15.3m – £51.0m = £10.6m

b) Goodwill at the year-end is £8.6m (i.e. £10.6m – £2.0m)

3 Effects of intragroup loans/debentures on assets and liabilities

The value of debentures held by one group member in another, or loans made from one group member to another should be:

Excluded from the relevant line in group assets
Excluded from the relevant line in group liabilities

Question 4
At its year-end, a parent company holds £744,000 of debentures in its sole subsidiary which were purchased at par. The subsidiary has £1,000,000 of debentures in issue, all of which will be repaid in 10 years’ time.
Using just this information calculate:
a) The value of debentures to be included in the non-current asset section of the consolidated statement of financial position
b) The value of debentures to be included in the non-current liabilities section of the consolidated statement of financial position
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a) The debenture asset is £nil (i.e. £744,000 – £744,000)

b) The debenture liability is £256,000 (i.e. £1,000,000 – £744,000)

Illustration

Nemesis Ltd purchased 60% of the share capital of Tyche Ltd on 01/01/2020. On the date of acquisition, Tyche Ltd had share capital of £200,000 and retained earnings of £1,200,000.

The fair value of Tyche Ltd’s net assets at the date of acquisition is £1,900,000 and the excess of fair value over carrying value can be attributed to the land owned by Tyche Ltd.

At the year-end it is determined that the goodwill in the subsidiary has been impaired by £50,000.

Nemesis Ltd owns £400,000 of debentures in Tyche Ltd.

The company’s statements of financial position as at 31/12/2020 is as follows.

Group assets: non-current assets

Property, plant and equipment will be calculated as the parent and subsidiary’s carrying values added together (i.e.£2,250,000 and £1,910,000) which will then be adjusted for the difference between the fair and carrying values of the subsidiary’s net assets.

The total of Tyche Ltd’s share capital and reserves at the date of acquisition was £1,400,000 (i.e. £200,000 plus £1,200,000) which equals the carrying value of Tyche Ltd’s net assets. As the fair value of the net assets at the same date was £1,900,000 we can calculate that there is a fair value adjustment to be made of £500,000. This will be added to the group’s property, plant and equipment as it all relates to Tyche Ltd’s property.

We can then eliminate the investment made by Nemesis Ltd in Tyche Ltd and calculate the value of goodwill at the year-end. We will therefore compare the amount paid for the shares in Tyche Ltd with the Nemesis Ltd’s share of the fair value of Tyche Ltd’s net assets. Lastly, we will deduct the goodwill impairment loss identified at the end of the year by the directors.

Next we can calculate the value of the group’s investment in debentures. In doing so we will add the value of the parent and subsidiary’s debentures and then deduct those debentures owned by other group companies.

Group assets: current assets

In this example, the group’s current assets will simply be calculated by adding together the values of the parent and subsidiary’s current assets.

Group liabilities: current liabilities

In this example, the group’s current liabilities will simply be calculated by adding together the values of the parent and subsidiary’s current liabilities.

Group liabilities: non-current liabilities

The group’s debentures in non-current liabilities will be calculated by adding those of the parent and subsidiary and then deducting the debentures held by one group company in the other.

The assets, liabilities and net assets of the group are shown below.

Group equity: share capital

The share capital of the group is the same as the share capital of the parent.

Group equity: retained earnings

The group’s retained earnings will consist of the parent company’s retained earnings less the goodwill impairment plus the parent’s share of the subsidiary’s post-acquisition retained earnings.

Group equity: non-controlling interest

The non-controlling interest will consist of the non-controlling interest’s share of Tyche Ltd’s share capital and reserves at their carrying value plus their share of the fair value adjustment made to the group’s property.

The equity section of the consolidated statement of financial statement can now be completed.

The consolidated statement of financial position is now complete.

Question 4

On 01/04/2020 a Parent company purchased 90% of the share capital of its Subsidiary for £500,000. On the same date, the Subsidiary had share capital of £200,000 and retained earnings of £50,000 but it was calculated that the fair value of its identifiable net assets was £400,000. The difference between fair and carrying values can be attributed to property.

At the year-end of 30/11/2020 the Parent owned £150,000 of debentures in the Subsidiary. On the same date the directors of the Parent determined that goodwill in the Subsidiary was impaired by £40,000.

The companies’ statements of financial position as at 30/11/2020 are shown below.