Group Accounts – The Consolidated Statement of Financial Position (2)

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1 Introduction

In the previous chapter we looked at the Consolidated Statement of Financial Position. However in every example the parent company owned 100% of the subsidiary.

In this chapter we will look at what happens when the parent company owns less than 100% but still has control of the subsidiary.

We will also look at the effect of any trading between the parent company and the subsidiary company.

2 Non-controlling interest

The fundamental point when the parent company owns less than 100% of the subsidiary is that in the Consolidated Statement of Financial Position we still show all the assets and liabilities of the group (because the parent company controls them), but we need to take account of the fact that part of these are in fact owned by the non-controlling interest.

3 Goodwill arising on consolidation

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The previous example was very simple because P acquired its holding in S on the date of incorporation and simply paid the value of its share of the assets less liabilities on that date.

However you will remember from the previous chapter that it is more likely that P would have acquired the holding on a later date and therefore may have paid more due to paying for goodwill.

As with all the other assets and liabilities, we wish to show the full value of the goodwill in the Consolidated Statement of Financial Position, but this will no longer simply be the difference between the amount paid and the value of the assets – it will be the difference between the total value of the business at the date of acquisition and the fair value of all the assets less liabilities at the date of acquisition.

The calculation of the goodwill arising on consolidation therefore becomes as follows:

We will show the full amount of the goodwill in the Consolidated Statement of Financial Position (in addition to showing the full amount of all the other assets and liabilities as usual). However, as before we will have an extra figure in the Statement of Financial Position showing the amount owing to the non-controlling interest.

The entitlement of the NCI will be made up of the following:

(Note: you may be wondering why we have not calculated the non-controlling interest in the same way as in example 1 – i.e. by just taking 40% of the share capital and reserves of S.

The reason is that they are also entitled to a share of the goodwill arising on consolidation, which does not appear in S’s own accounts.

We can calculate this and thus check the NCI as follows:

NCI at 31 December 2010:

This is the same figure that we have already calculated.)

Now we need to calculate the retained earnings belonging to P. This will be calculated in the normal way:

We are now in a position to produce the Consolidated Statement of Financial Position as at 31 December 2010.

4 Inter-entity transactions

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Although our work focuses on preparing a set of consolidated accounts, do remember that the parent company and the subsidiary company are two separate companies and that both of them prepare their own accounts in the normal way.

It is quite possible that the two companies trade with each other – i.e. that the parent company sells goods to the subsidiary company (or vice versa).

If this has happened, then there are two things that we need to be aware of when we come to prepare the consolidated accounts:

1. we only want to show receivables and payables from outside the group – we do not want to include receivables and payables between the parent and subsidiary

2. we only wish to record profits made as a result of sales outside the group

We will illustrate these two problems and how we deal with them by way of examples.

(a)   Inter-entity balances

(b)   Inventory sold at a profit within the group

The problem here relates to the situation where one of the companies has sold goods to the other company at a profit, and the receiving company still has some of the goods in inventory.

If the goods have been sold by the receiving company then all the profit has been realised and there is no problem.

If, however, some of the goods are still in inventory then there are two problems when we come to prepare consolidated accounts:

(i)   the inventory in the accounts of the receiving company will include the profit made by the selling company, whereas in the consolidated accounts we should be showing it at cost to the group.

(ii)   included in the profits of the selling company will be all the profit on goods sold to the other company. However the profit on any goods still in inventory should not be included in the profit of the group because the goods have not left the group (and the profit has therefore not been realised)

To deal with both problems we do the following:

(i)   calculate the unrealised profit in inventory,

(ii)   reduce the inventory and reduce the retained earnings of the company that has sold the goods by the amount of the unrealised profit.