HUANG HUAI UNIVERSITY Financial Accounting II

1. HUANG HUAI UNIVERSITYFinancial Accounting II Lectures 3 & 4 Consolidated Income Statement/ Consolidated Statements of Comprehensive Income DR AZIZ JAAFAR

2. 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

3. Example – Ante Group • At the date of acquisition on 1 January 20X1 • Ante acquired • 75% of the common shares and • 20% of the preferred shares in Post • the retained earnings of Post were £30,000. • Ante paid £10,000 more than the fair value of the net assets acquired.

4. Example – Ante Group 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 and, 20% is to be written off goodwill as an impairment loss.

5. Example – Ante Group Income statements for the year ended 31 December 20X2 Ante Post Sales 200,000 120,000 Cost of sales 60,00060,000 Gross profit 140,000 60,000 Expenses 59,082 40,000 Impairment of goodwill – – Profit from operations 80,918 20,000 Div. received - common 3,750 - Div. received - preferred 600_______ Profit before tax 85,268 20,000 Income tax expense 14,0046,000 Profit for the period 71,264 14,000

6. Example – Ante Group Ante Post Profit for the period 71,264 14,000 (from previous slide) Profit att. to min. interests Profit att. to the parent Div. paid – common 40,000 5,000 Div. paid – preferred - 3,000 31,264 6,000 Retained earnings brought forward from previous yr. 69,33654,000 Retained Earnings carried forward 100,000 60,000

7. Ante example – Notes 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.

8. Ante example – Notes 2 2. Eliminate unrealized 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 good remain in the inventories of Post at the year-end (iii) From the Group’s view there is an unrealized profit of half of the mark up i.e. 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 unrealized profit - Reduce the inventories in the consolidated balance sheet by the amount of the provision (as explained in the previous lecture)

9. Ante example – Notes 3 3. Aggregate the adjusted sales and cost of sales figures for items in Notes 1 and 2 (i) Add the adjusted sales figures [(200,000 – 12 000 inter-co. sales) + 120 000] = 308 000 (ii) Add the adjusted cost of sales figures; 60 000 + (60 000 – 12 000) + 1 500 provision = 109 500

10. Ante example – Notes 4 and 5 4. Aggregate expenses No adjustment is required to the parent or subsidiary total figures 5. Deduct the impairment loss on Goodwill = 2 000

11. 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 minority (the 1,250 will be included in the consolidated balance sheet minority interest figure).

12. Ante example – Note 6 (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 minority and 2,400 will be included in the consolidated balance sheet minority interest figure.

13. Ante example – Note 7 7. Aggregate the taxation figures. No adjustment is require to the parent or subsidiary total figures Net profit from ordinary activities Adjustment is required to establish how much of the profit after tax is available for the parent company’s common shareholders and represents their share of the profit for the year. This entails deducting the minority interest in the subsidiary company as a percentage of the subsidiary’s after tax figure, as adjusted for any preference dividend.

14. Ante example – Note 8 8. Calculate the share of post-taxation profits belonging to the minority interest Preferred shares – dividend on these shares Minority shareholders hold 80% of preferred shares ( 80% x 3 000) = 2 400 Common shares - % of profit after tax of the subsidiary less preferred share dividend. Minority shareholders hold 25% of common shares 25% x (14 000 – 3 000) = 2 750 Total minority interests in the profit after tax of the subsidiary 5 150

15. Ante example – Note 9 9. Dividends paid and payable to parent common s/holders: The dividends paid and payable in the consolidated accounts will always be the parent’s company’s dividends. This is because the dividends payable to the minority are payable out of the minority’s share of the profit after taxation, which has been deducted in arriving at the group’s share of the profit after taxation. To deduct the 1250 common and 2 400 preference dividends payable to the minority would be double counting. The dividend payable: In this example, there is a dividend payable and no interim dividend has been paid during the year.

16. Ante example – Note 10 10. Retained earnings The retained earnings at the beginning of the year is added to the net profit for the period. It is calculated as: Ante retained earnings brought forward 69 336 The group’s share of Post’s post-acquisition Retained earnings 75% x (54 000 – 30 000) 18 000 87 336

17. Example – Ante Group Consolidated Income statements for the year ended 31 December 20X2 Sales 308 000 Notes 1/3 Cost of sales 109 500 Notes 1/2/3 Gross profit 198 500 Expenses 99 082 Note 4 Impairment of goodwill 2 000 Note 5 Profit from operations 97 418 Div. received - common - Note 6 Div. received - preferred - Note 6 Profit before tax 97 418 Income tax expense 20 004 Note 7 Profit for the period 77,414

18. Example – Ante Group Profit for the period 77 414 (from previous slide) less Profit attributable to minority interests 5 150 Note 8 Profit attributable to the parent 72 264 less Div. paid – common 40 000 Note 9 Div. paid – preferred - Note 9 32 264 Retained earnings brought forward from previous yr. 87 336 Note 10 Retained Earnings carried forward 119 600