Walkthrough question two (<100% ownership)
This chapter walks through how to prepare a consolidated statement of financial position when there are post-acquisition activities, including intra-group trading and fair value adjustments to property, plant and equipment at acquisition.
Learning objectives
By the end of this chapter, you should be able to prepare a full consolidated statement of financial position, considering:
- Fair value adjustments at acquisition on property, plant and equipment
- Fair value of consideration transferred from cash and shares
- Elimination of intra-group trading balances
- Removal of unrealised profit arising on intra-group trading
Illustration 2: Less than 100% owned subsidiary with post-acquisition activities
On March 1, 2024, Moon Limited acquired 70% of the ordinary shares of Star Limited for $15 million when Star Limited’s retained earnings were $5 million.
At the acquisition date:
- The fair value of Star Limited’s identifiable net assets was $15 million (exclusive of the land fair value adjustment).
- The fair value of the non-controlling interest (NCI) was $10 million.
The statements of financial position for both companies as at December 31, 2025, are as follows.
Statement of financial position as at 31 December, 2025
| Moon Limited | Star Limited | |
|---|---|---|
| Non-current asset: | $'000 | $'000 |
| Property, plant and equipment | 49,400 | 6,500 |
| Investment in Star Limited | 15,000 | - |
| Current asset: | ||
| Inventories | 40,000 | 6,400 |
| Trade receivables | 6,800 | 4,600 |
| Cash and bank | 2,300 | 5,500 |
| Total assets | 113,500 | 23,000 |
| Equity: | ||
| Share capital | 70,000 | 10,000 |
| Retained earnings | 23,000 | 9,000 |
| Liabilities: | ||
| Trade payables | 20,500 | 4,000 |
| Total equity and liabilities | 113,500 | 23,000 |
Additional information:
- Star Limited had land with a carrying amount of $5 million, but it was fair valued at $6 million at the acquisition date. The land has not been disposed of since acquisition.
- During the year, Star Limited sold inventory to Moon Limited for $2,000,000. The inventory had cost Star Limited $1,500,000. Moon Limited still holds 40% of this inventory at year-end.
- At year-end, Star Limited’s trade receivables include $500,000 due from Moon Limited, which corresponds to an equal amount in Moon Limited’s trade payables.
Required: Prepare the consolidated statement of financial position for Moon Limited and its subsidiary as at December 31, 2025.
Suggested solutions:
Try solving the question yourself before checking the workings below. As a reminder, the acquisition method follows four steps: determine the group structure, calculate the subsidiary’s net assets at acquisition and at the reporting date, compute goodwill, and determine the non-controlling interest and group retained earnings at the reporting date. The workings below focus on the results, with only brief notes where needed.
W1: Group structure
Work it out and compare with the suggested solution.
| Parent company | Moon Limited |
|---|---|
| Ownership | 70% |
| NCI holding | 30% |
| Acquisition date | 1 March 2024 |
| Reporting date | 31 December 2025 |
| Post-acquisition period | 22 months |
W2: Net assets of the subsidiary
Work it out and compare with the suggested solution.
- Note: There is a fair value adjustment on land. Only the fair value adjustment is added to the subsidiary’s net assets.
| Amount @acquisition date | Amount @reporting date | Post-acquisition profit | |
|---|---|---|---|
| $'000 | $'000 | $'000 | |
| Share capital | 10,000 | 10,000 | 0 |
| Retained earnings | 5,000 | 9,000 | 4,000 |
| Fair value adjustment - land | 1,000 | 1,000 | 0 |
| Totals | 16,000 | 20,000 | 4,000 |
Note: If you’re unsure about the fair value adjustment, refer to Step 2 of the acquisition method. The fair value increase is included in the consolidated statement of financial position.
W3: Goodwill computations
Work it out and compare with the suggested solution.
| $'000 | |
|---|---|
| Consideration | 15,000 |
| NCI @ acquisition date | 10,000 |
| Net asset @acquisition date (W2) | (16,000) |
| Goodwill at acquisition date | 9,000 |
If part of the consideration transferred had been settled in the parent’s own shares, those shares would be measured at their fair value at the acquisition date (number of shares issued × market price per share) and added to any cash paid to arrive at the total consideration used in this working.
W4: NCI at reporting date
Work it out and compare with the suggested solution. Hint: calculate the PURP and show the adjustments (effect).
- Compute the provision for unrealised profit. The subsidiary is the seller, so the adjustment affects the NCI (see W6).
| $'000 | |
|---|---|
| NCI @ acquisition date | 10,000 |
| NCI share of post-acquisition profit - 30%*4million (W2) | 1,200 |
| PURP adjustment (30% * $200,000 W6) | (60) |
| NCI at reporting date | 11,140 |
W5: Group retained earnings (GRE)
Work it out and compare with the suggested solution. Hint: calculate the PURP and show the adjustments (effect).
- Note: The PURP also affects group retained earnings in proportion to the parent’s ownership. Since retained earnings normally have a credit balance, a debit reduces (subtracts from) the balance.
| $'000 | |
|---|---|
| Parent’s RE at reporting date | 23,000 |
| Parent’s share of post-acquisition profit - 70% * 4million (W2) | 2,800 |
| PURP adjustment (70% * $200,000 (W6)) | (140) |
| GRE at reporting date | 25,660 |
W6: Other adjustments
Work it out and compare with the suggested solution. Hint: there are two major adjustments - PURP and intra-group balance.
- Provision for unrealised profit - PURP Calculate the PURP and show the necessary adjustments
PURP = (2 million - 1.5 million) * 40% = $200,000
Adjustment:
| Account | Dr | Cr |
|---|---|---|
| Group retained earnings ($200,000 × 70%) | $140,000 | |
| NCI ($200,000 × 30%) | $60,000 | |
| Inventories | $200,000 |
- Intra-group balances
Identify the intra-group balance and pass the necessary journal entries.
| Account | Dr | Cr |
|---|---|---|
| Trade payables | $500,000 | |
| Trade receivables | $500,000 |
Preparation of the consolidated statements of financial position
As usual, state the name of the group and the statement you are preparing. Procedures 1 and 2 from the earlier illustration still apply. In addition, you eliminate in full intra-group assets and liabilities, equity, income, expenses, and cash flows relating to transactions between entities within the group.
In this question, there are two intra-group items to eliminate:
- PURP: The debits to NCI and group retained earnings have already been reflected in W4 and W5. The remaining entry is the credit to inventories of $200,000, which reduces inventories on the face of the consolidated statement of financial position.
- Intra-group balance: The debit to trade payables and the credit to trade receivables have not yet been reflected on the face of the statement of financial position.
Note: For equity, income, and liability accounts, elimination is typically a debit. For asset and expense accounts, elimination is typically a credit.
Take your time and prepare the full consolidated statements before proceeding to check the answer.
The statement of financial position would look like this after all these adjustments.
Moon Group
Consolidated statement of financial position as at 31 December, 2025
| $'000 | |
|---|---|
| Non-current asset: | |
| Property, plant and equipment (49,400 + 6,500 + 1,000 W2*) | 56,900 |
| Investment in Star Limited (15,000 - 15,000) | 0 |
| Goodwill (W3) | 9,000 |
| Current asset: | |
| Inventories (40,000 + 6,400 - 200) | 46,200 |
| Trade receivables (6,800 + 4,600 - 500) | 10,900 |
| Cash and bank (2,300 + 5,500) | 7,800 |
| Total assets | 130,800 |
| Equity: | |
| Share capital (70,000 + 10,000 - 10,000) | 70,000 |
| Group retained earnings (W5) | 25,660 |
| Non-controlling interest (W4) | 11,140 |
| Liabilities: | |
| Trade payables (20,500 + 4,000 - 500) | 24,000 |
| Total equity and liabilities | 130,800 |
If your figures differ, go back to the relevant topic (chapter) to refresh the underlying adjustment, then attempt the question again without referring to the solution.