Slide 23.1
Preparation of Consolidated Statements of Financial Position after
the Date of Acquisition
Chapter 23
Slide 23.2
By the end of this chapter, the reader should be able to:• account for the post-acquisition profits of a subsidiary;• eliminate inter-company balances and deal with reconciling items;• account for unrealised profits on inter-company transactions.
Objectives
Slide 23.3
Pre- and post-acquisition profits
• Pre-acquisition profits
– Made before date in which parent acquired control
– Represent net assets at acquisition date
– Are dealt with through goodwill calculation
• Post-acquisition profits
– Made after date of acquisition
– Include consolidated income statement.
Slide 23.4
Example: Bend Group – pp.606-607 (pp.421-422)
1 January 20X1Bend acquired 80% of the 10,000 £1 common
shares in Stretch plcInvestment in Stretch cost £12,000Retained earnings were £4,000Fair value of the non-controlling interest at the
date of acquisition was £2,950Fair value of non-current assets was £600
above book value.
Slide 23.5
The Bend Group statement of financial position at 31 December
Slide 23.6
The Bend Group goodwill calculation
£
Slide 23.7
Total goodwill calculation
£
Fair value of non-controlling interest at date of acquisition 2,950
20% of net assets at date of acquisition (10,000 + 4,000 + 600) (2,920)
Goodwill attributable to the non-controlling interest 30
Total goodwill (£320 + £30) 350
Slide 23.8
The Bend Group non-controllinginterest calculation
Non-controlling interest in goodwill 30 Non-controlling interest 3,350
£
Slide 23.9
The Bend Group asset aggregation
£ £ £
350
55,950
(parent company only)
(parent company)
££
Slide 23.10
Inter-company balances
Preferred shares held by parentBonds held by parentInter-company trading and loan balancesInter-company dividends payable/receivable.
Slide 23.11
Preferred shares held by parent
Preferred shares acquired on the acquisition Represented by net assets at date of acquisition Dealt with through goodwill
Preferred shares not acquired Part of non-controlling interests
Slide 23.12
Bonds held by parent
Bonds acquired on the acquisition Represented by net assets at date of acquisition Dealt with through goodwill
Bonds acquired on the acquisition Appear in balance sheet as long-term loan (Liability).
Slide 23.13
Inter-company trading and loan balancesReconcile balance in parent with subsidiary
Should be the same Timing differences such as cash in transit Update to make balances equal
Eliminate the inter-company balances Subsidiary as debtor in parent balance sheet; parent
as creditor in subsidiary balance sheet.
Slide 23.14
Example: Prose Group – pp.610-614 (pp.425-428)
1 January 20X1 Prose acquired in Verse
80% of the 10,000 £1 common shares for £21,100 20% of preferred shares for £2,000 10% of the bonds for £900
Retained earnings were £4,000 Fair value of non-current assets was £1,000 >
BV.
Slide 23.15
Example – the Prose Group (Continued)During 20X1
Prose sold inventory to Verse for £3,000 This was at cost plus 25% Half was still in inventory at 31 December
Group accounting policies Increase non-current assets by 100% of excess.
Slide 23.16
The Prose Group – asset section
Slide 23.17
The Prose Group – equity and liability section
Slide 23.18
The Prose Group – goodwill calculation
Slide 23.19
The Prose Group – inter-company adjustments
Slide 23.20
The Prose Group – non-controlling interest
Slide 23.21
The Prose Group – aggregate assets
Slide 23.22
The Prose Group – equity section
Slide 23.23
Uniform accounting policies
Parent and subsidiary to use uniform policiesAccounts with year ends within 3 months of
each other Subject to adjustment for significant transactions.
Slide 23.24
Review questions
1. The 2006 accounts of Eybl International state:
Elimination of intra-group balances
Advances . . . arising in the course of business between the companies included in the consolidation . . . are eliminated.
(a) Discuss three examples of inter-company (also referred to as intra-group) accounts
(b) Explain what is meant by ‘have been eliminated’
(c) Explain what effect there could be on the reported group profit if inter-company transactions were not eliminated.
Slide 23.25
Review questions (Continued)
2. Explain why the non-controlling interest is calculated as at the year-end whilst goodwill is calculated at the date of acquisition.
3. Explain why pre-acquisition profits of a subsidiary are treated differently from post-acquisition profits.
4. Explain the effect of a provision for unrealised profit on a non-controlling interest:
(a) where the sale was made by the parent to the subsidiary and
(b) where the sale was made by the subsidiary to the parent.
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