Preparation of Consolidated Statements of Financial Position after the Date of Acquisition

1. Chapter 23 Preparation of Consolidated Statements of Financial Position after the Date of Acquisition

2. Objectives 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.

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.

4. Example: Bend Group – pp.606-607(pp.421-422) 1 January 20X1 • Bend acquired 80% of the 10,000 £1 common shares in Stretch plc • Investment in Stretch cost £12,000 • Retained earnings were £4,000 • Fair value of the non-controlling interest at the date of acquisition was £2,950 • Fair value of non-current assets was £600 above book value.

5. The Bend Group statement of financial position at 31 December • Note: Stretch’s retained earnings at 31 Dec. are $6,000. At 1 Jan. they were $4,000

6. £ The Bend Group goodwill calculation

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

8. £ The Bend Group non-controllinginterest calculation • Non-controlling interest in goodwill 30 • Non-controlling interest 3,350

9. £ £ £ 350 55,950 £ £ (parent company only) (parent company) The Bend Group asset aggregation

10. Inter-company balances • Preferred shares held by parent • Bonds held by parent • Inter-company trading and loan balances • Inter-company dividends payable/receivable.

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

12. Bonds held by parent • Bonds acquired on the acquisition • Represented by net assets at date of acquisition • Dealt with through goodwill • Bonds not acquired on the acquisition • Appear in balance sheet as long-term loan (Liability).

13. Inter-company trading and loan balances • Reconcile 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 (and vice versa).

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.

15. Example – the Prose Group (Continued) • During 20X1 • Prose sold inventory to Verse for £3,000 • This was at cost plus 25% • Half of this was still in inventory at 31 December • Group accounting policies • Increase non-current assets by 100% of excess.

16. The Prose Group – asset section • Prose Verse

17. The Prose Group – equity and liability section

18. The Prose Group – goodwill calculation

19. The Prose Group – inter-company adjustments

20. The Prose Group – non-controlling interest

21. The Prose Group – aggregate assets

22. The Prose Group – equity section

23. Uniform accounting policies • Parent and subsidiary to use uniform policies • Accounts with year ends within 3 months of each other • Subject to adjustment for significant transactions.

24. Review questions • 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.

25. Review questions (Continued) • Explain why the non-controlling interest is calculated as at the year-end whilst goodwill is calculated at the date of acquisition. • Explain why pre-acquisition profits of a subsidiary are treated differently from post-acquisition profits. • 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.