Group Accounts – The Consolidated Statement of Financial Position (1)
1 Introduction
Consolidated accounts are required when one company controls other companies. This can happen in many ways, but you will only be expected to deal with the simplest situation, which is where one company controls one other company.
Each company will prepare its own set of accounts. However, another set of accounts will be prepared for the group as a whole. These are known as the consolidated accounts.
In this and the next chapter we will look at the Consolidated Statement of Financial Position. In the third chapter we will consider the Consolidated Statement of Profit or Loss.
2 Definitions
Consolidated accounts are required if ever one company controls another. The precise definition of control contains several provisions, but the most common situation is where one company owns more than 50% of the ordinary share capital of the other company.
Parent company
The parent company is the company that controls the other company.
Subsidiary company
The subsidiary company is the company that is controlled by the parent company.
Group of companies
This is the parent company plus its subsidiaries.
Consolidated accounts
These are the accounts for the whole group, where we treat the group as though it is one big company.
Non-controlling interest
If the parent company does not own 100% of the subsidiary then the part owned by others is known as the non-controlling interest.
3 The Consolidated Statement of Financial Position
The purpose of the Consolidated Statement of Financial Position is to show all the assets and liabilities that are controlled by the parent company – effectively as though it is one big company.
We will work through a simple example and then gradually bring in the various complications that can occur.
On 1 January 2008, P acquired 100% of the ordinary shares of S, which was incorporated on that date.
On 31 December 2010, the Statements of Financial Position of each the two companies were as follows:
P | S | ||
Non-current assets | 25,000 | 12,000 | |
Investment in S, at cost | 10,000 | ||
Current assets | 8,000 | 9,000 | |
43,000 | 21,000 | ||
Share capital - $1 shares | 25,000 | 10,000 | |
Retained earnings | 15,000 | 8,000 | |
Current liabilities | 3,000 | 3,000 | |
43,000 | 21,000 |
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4 Pre-acquisition profits
In the previous example, P had acquired S on incorporation (i.e. on the date that the company was formed).
Very often a company acquires another company some years after incorporation in which case the company will have earned profits by the time that they are acquired.
As a result the purchase price paid by the parent company will be for the share capital plus any profits already earned. These profits earned before the date of acquisition are known as pre-acquisition profits.
P acquired 100% of the share capital of S on 1 January 2006 for $28,000, at which date the retained earnings of S amounted to $8,000.
At 31 December 2009 the companies’ Statements of Financial Position were as follows:
P | S | ||
Non-current assets | 55,000 | 25,000 | |
Investment in S, at cost | 28,000 | ||
Current assets | 18,000 | 14,000 | |
101,000 | 39,000 | ||
Share capital - $1 shares | 60,000 | 20,000 | |
Retained earnings | 38,000 | 15,000 | |
Current liabilities | 3,000 | 4,000 | |
101,000 | 39,000 |
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5 Goodwill arising on consolidation
In both of the previous examples the amount that the parent company paid for the subsidiary was equal to the value of the subsidiary as shown in its Statement of Financial Position.
However, there are two reasons why the parent company may have paid more than this amount.
One reason is that the non-current assets may have been worth more than the carrying value (this is particularly likely to apply to any land and buildings). We would therefore expect the parent company to have paid a ‘fair value’ for the assets.
A second reason is that the parent company may have paid more than the fair value of the assets and liabilities because they were acquiring the goodwill of the subsidiary. If they did pay for goodwill, then although it will not appear in the accounts of the individual companies it will mean that there is an extra asset to appear in the consolidated Statement of Financial Position.
P acquired 100% of the share capital of S on 1 January 2005 for $60,000. On 1 January 2005, the retained earnings of S were $15,000 and the fair value of the non-current assets was $9,000 more than the carrying value.
At 31 December 2009 the companies’ Statements of Financial Position were as follows:
P | S | ||
Non-current assets | 82,000 | 27,000 | |
Investment in S, at cost | 60,000 | ||
Current assets | 20,000 | 12,000 | |
162,000 | 39,000 | ||
Share capital - $1 shares | 50,000 | 10,000 | |
Retained earnings | 110,000 | 28,000 | |
Current liabilities | 2,000 | 1,000 | |
162,000 | 39,000 |
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P acquired 100% of the share capital of S on 1 July 2004 for $25,000. On 1 July 2004, the retained earnings of S were $6,000 and the fair value of the non-current assets was $6,000 more than their carrying value.
At 30 June 2010 the companies’ Statements of Financial Position were as follows:
P | S | ||
Non-current assets | 76,000 | 18,000 | |
Investment in S, at cost | 25,000 | ||
Current assets | 12,000 | 9,000 | |
113,000 | 27,000 | ||
Share capital - $1 shares | 40,000 | 5,000 | |
Retained earnings | 70,000 | 20,000 | |
Current liabilities | 3,000 | 2,000 | |
113,000 | 27,000 |
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Group Accounts The Consolidated Statement of Financial Position (1)
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