Transcript Document 7173435

Slide 24.1
Chapter 24
Preparation of Consolidated
Statements of Comprehensive
Income, Changes in Equity and
Cash Flows
Slide 24.2
Objectives
By the end of this chapter, you should be able to:
• prepare a consolidated statement of
comprehensive income;
• eliminate inter-company transactions from a
consolidated statement of comprehensive income;
• attribute comprehensive income to the noncontrolling shareholders;
• prepare a consolidated statement of changes in
equity;
• prepare a consolidated statement of cash flows.
Slide 24.3
Consolidated income statements
• Treatment in consolidated income statement of:
– Unrealised profit on inter-company inventories
– Pre-acquisition profits
– Dividends or interest paid out of pre-acquisition
profits
– Adjustment required when a subsidiary is acquired
part of the way through the year.
Slide 24.4
Example – Ante Group
At the date of acquisition on 1 January 20X2
• Ante acquired
– 75% of the common shares and
– 20% of the preferred shares in Post plc
• The retained earnings of Post were £30,000
• Ante paid £10,000 more than the fair value of the
net assets acquired.
Slide 24.5
Example – Ante Group (Continued)
During the year ended 31 December 20X2
Ante had sold Post goods at their cost price of
£9,000 plus a mark up of a third
At the end of the financial year on 31
December 20X2
Half of these goods were still in the inventory
at the end of the year
20% is to be written off goodwill as an
impairment loss.
Slide 24.6
Example – Ante Group (Continued)
Statement of comprehensive income for the year
ended 31 December 20X2
Ante £
Sales
200,000
Cost of sales
60,000
Gross profit
140,000
Expenses
59,082
Impairment of goodwill
Profit from operations80,918
Post £ Consolidated £
120,000 308,000 Notes 1/3
60,000 109,500 Notes 1/2/3
60,000 198,500
40,000
99,082
Note 4
2,000
Note 5
20,000
97,418
Slide 24.7
Ante example – Note 1
1. Eliminate inter-company sales on consolidation
Cancel the inter-company sales of 12,000 (9,000 + 1/3) by
(i) Reducing the sales of Ante from 200,000 to 188,000
and
(ii) Reducing the cost of sales of Post by the same
amount from 60,000 to 48,000
Slide 24.8
Ante example – Note 2
 2. Eliminate unrealised profit on inter-company goods that were
still in inventory
 (i) Ante had sold the goods to Post at a mark up 3,000
 (ii) Half the goods remain in the inventories of Post at the year-end
 (iii) From the Group’s view there is an unrealised profit of half of the
mark up, that is 1,500. Therefore:
 – Deduct 1,500 from the gross profit of Ante by adding this
amount to the cost of sales
 – Add this amount to a provision for unrealised profit
 – Reduce the inventories in the consolidated statement of
financial position by the amount of the provision (as explained in
the previous chapter).
 – Deduct 1,500 from the gross profit of Ante by adding this
amount to the cost of sales
 – Add this amount to a provision for unrealised profit
 – Reduce the inventories in the consolidated statement of
financial position by the amount of the provision (as explained in
the previous chapter).
Slide 24.9
Ante example – Notes 3 to 5
Slide 24.10
Ante example – Note 6
6. Accounting for the inter-company dividends
(i) The common dividend 3,750 received by Ante is 75% of the 5,000
dividend payable by Post
(ii) Cancel the inter-company dividend receivable by Ante with 3,750
dividend payable by Post, leaving the 1,250 dividend payable by
Post to the non-controlling interest (the 1,250 will be included in the
consolidated statement financial position non-controlling interest
figure)
(iii) The preferred dividend of 600 received by Ante is 20% of the 3,000
payable by Post
(iv) Cancel 600 preferred dividend receivable by Ante with 600 of the
preferred dividend payable by Post
(v) The balance of 2,400 remaining is payable to the non-controlling
interest and 2,400 will be included in the consolidated statement of
financial position non-controlling interest figure.
Slide 24.11
Ante example – Note 7
Slide 24.12
Ante example – Note 8
£
Slide 24.13
Ante SOCE
Slide 24.14
Ante SOCE (Continued)
Slide 24.15
Ante SOCE (Continued)
 Note 2: Opening balance for non-controlling
shareholders
 54,000 x 25% = 13,500. The relevant percentage to use
is 25% because only ordinary shareholders will have any
interest in retained profits.
 Note 3: Dividends paid
 In the Ante Group column the dividends paid are those of
the parent only. The parent share of Post dividends is
cancelled by Ante’s investment income. Non-controlling
share is dealt with in their column. Non-controlling
shareholders dividends are 25% of 5,000 + 80% of 3,000
Slide 24.16
Adjustment where non-current asset
is acquired from a subsidiary
Digdeep plc is a civil engineering company
that has a subsidairy, Heavylift plc that
manufactures digging equipment
Assume that at the beginning of the financial
year Heavylift sold equipment costing £80,000
to Digdeep for £100,000
It is Digdeep’s depreciation policy to
depreciate at 5% using the straight line
method.
Slide 24.17
Revenue adjustment
On consolidation, the following adjustments are required:
 Revenue is reduced by £20,000 and the asset is reduced
by £20,000 to bring the asset back to its cost of £80,000
 Revenue is then reduced by £80,000 and cost of sales
reduced by £80,000 to eliminate the intra-group sale
 Depreciation needs to be based on the cost of £80,000
by crediting depreciation and debiting the accumulated
depreciation. The depreciation charge was £5,000 (5% of
£100,000), it should be £4,000 (5% of £80,000) so the
adjustment is:
DR: Accumulated depreciation
£1,000
CR: Depreciation in the statement of income
£1,000
Slide 24.18
Subsidiary acquired part way through
year
Restrict profits recognised in consolidated
accounts
 Only include post acquisition profit.
Slide 24.19
Tight example
At the date of acquisition on 30 September
20X1
Tight acquired
 75% of the common shares and
 20% of the 5% bonds in Loose
The retained earnings of Loose were £69,336
Tight paid £10,000 more than the book value
of the net assets acquired
 The book value and fair value were the same.
Slide 24.20
Tight example (Continued)
During the year
 All income and expenses accrued evenly
 Dividend receivable may be apportioned on
a time basis
On 30 June 20X0 Tight sold Loose goods for
£4,000 plus a mark-up of one-third.
Slide 24.21
Tight example (Continued)
At the end of the financial year
 Tight prepares consolidated accounts at 31 December
 Half of intra-group goods were still in stock.
Slide 24.22
Tight income statements
£
£
£
Slide 24.23
Tight income statements (Continued)
Slide 24.24
Tight – Notes 1 to 3
Slide 24.25
Tight – Note 4
4. Accounting for inter-company interest
The interest receivable by Tight is apportioned on a time basis, 9/12  2,000  1,500
is treated as being pre-acquisition and deducted from the cost of the investment in
Loose.
The remainder (£500) is cancelled with £500 of the post-acquisition elements of the
interest payable by Loose. The interest payable figure in the consolidated financial
statements will be the post-acquisition interest less the inter-company elimination
which represents the amount payable to the holders of 80% of the bonds.
Total interest payable 10,000  pre-acquisition 7,500  inter-company 500  £2,000
Slide 24.26
Tight – Notes 5 and 6
£
5. Accounting for inter-company dividends
Amount receivable by Tight
= 3,600
The dividend receivable by Tight is apportioned on a time basis, the
pre-acquisition element is credited to the cost of the investment in Tight’s
balance sheet, that is 9/12  3,600
= (2,700)
The post-acquisition element is cancelled with part of the dividend payable
in Loose’s income statement prior to consolidation
= (900)
Amount credited to consolidated income statement
NIL
6. Aggregate the tax figures
This includes the whole of the parent’s tax and the time apportioned
subsidiary’s tax, that is 14,004 + (6,000  3/12)
= £15,504
The group taxation is that of Tight plus 3/12 of Loose
Slide 24.27
Tight – Note 7
Slide 24.28
Tight – published format
Slide 24.29
Tight – published format (Continued)
Slide 24.30
Subsidiary acquired during the year
Slide 24.31
Review questions
1. Explain why the dividends deducted from the
group in the statement of changes in equity are
only those of the parent company.
2. Explain how unrealised profits arise from
transactions between companies in a group and
why it is important to remove them.
3. Explain why it is necessary to apportion a
subsidiary’s profit or loss if acquired partway
through a financial year.
4. Explain why dividends paid by a subsidiary to a
parent company are eliminated on consolidation.
Slide 24.32
Review questions (Continued)
5. Give five examples of intercompany income and
expense transactions that will need to be eliminated
on consolidation and explain why each is necessary.
6. A shareholder was concerned that following an
acquisition the profit from operations of the parent
and subsidiary were less than the aggregate of the
individual profit from operations figures. She was
concerned that the acquisition, which the directors
had supported as improving earnings per share,
appeared to have reduced the combined profits.
She wanted to know where the profits had gone.
Give an explanation to the shareholder.