Walkthrough question one
This chapter walks you through how to prepare a consolidated statement of profit or loss for a full-year acquisition. It also shows how to apportion (allocate) the group’s profit between:
- the owners of the parent company, and
- the non-controlling interest (NCI).
Learning objectives
By the end of this chapter, you should be able to prepare a full consolidated statement of profit or loss, considering:
- Elimination of intra-group trading balances
- Removal of unrealised profit arising on intra-group trading
- How an acquisition part way through the year changes the subsidiary’s figures (worked in Walkthrough question two)
Consolidated statement of profit or loss
The procedure for consolidating statements of profit or loss is similar to the procedure used for the consolidated statement of financial position. The key difference is this:
- In the statement of profit or loss, we consolidate income and expenses.
- We don’t offset (eliminate) the carrying amount of the parent’s investment against the parent’s share of the subsidiary’s equity, because those items relate to the statement of financial position, not profit or loss.
In a mid-year acquisition, the parent’s income and expenses are included for the full year, but the subsidiary’s are consolidated on a pro-rata basis (only its post-acquisition period is included). As with the consolidated statement of financial position, you also need to adjust for intra-group trading when preparing the consolidated statement of profit or loss.
Profit attributable to parent and subsidiary
After you consolidate the statement of profit or loss line by line, you’ll have a single profit for the year for the group. That profit must then be split to show how much is attributable to:
- the owners of the parent (the group), and
- the NCI.
Use the steps below consistently to allocate profit between the group and the NCI.
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Write down the profit for the year (i.e., profit after tax) for the subsidiary company.
-
Adjust the subsidiary’s profit for the year for any intra-group transactions that affect that profit.
Hint: If the subsidiary is the seller in an intra-group sale that creates PURP, the subsidiary’s profit is overstated by the PURP. You reduce the subsidiary’s profit by that amount. At this level, this is likely to be the only adjustment you may be tested on.
-
Compute the NCI share of profit as: Adjusted profit of subsidiary (from step 2) x NCI % holding
-
Compute the group share of profit as: Consolidated profit for the year - NCI share of profit (from step 3)
Illustration 1: full year acquisition
Moonlight Ltd. acquired 80% of the equity shares of Sunshine Ltd. on 1st January 2024. The following are the individual Statements of Profit or Loss for both companies for the year ended 31st December 2024.
| Moonlight Ltd. | Sunshine Ltd. | |
|---|---|---|
| $ | $ | |
| Revenue | 5,000,000 | 2,000,000 |
| Cost of sales | (2,000,000) | (800,000) |
| Gross profit | 3,000,000 | 1,200,000 |
| Other income | 70,000 | 50,000 |
| Distribution costs | (400,000) | (180,000) |
| Administrative expenses | (700,000) | (370,000) |
| Operating profit | 1,970,000 | 700,000 |
| Profit before financing and income taxes | 1,970,000 | 700,000 |
| Finance costs | (200,000) | (100,000) |
| Profit before income taxes | 1,770,000 | 600,000 |
| Income tax expense | (530,000) | (180,000) |
| Profit for the year | 1,240,000 | 420,000 |
Additional information: During the year, Moonlight Ltd. sold goods worth $500,000 to Sunshine Ltd. at a profit margin of 25%. Out of these goods, 40% remained unsold in Sunshine Ltd.'s inventory at year-end.
Required: Prepare the consolidated statement of profit or loss for Moonlight Ltd. and its subsidiary for the year ended 31st December 2024.
Suggested solution:
W1: group structure
Work it out and compare with the suggested solution.
| Parent company | Moonlight Ltd |
| Subsidiary | Sunshine Ltd |
| Ownership | 80% |
| NCI holding | 20% |
| Acquisition date | 1 January 2024 |
| Reporting date | 31 December 2024 |
| Post-acquisition period | 12 months (1 year) |
W2: computation and adjustments
W2 is not standardised. In any consolidated statement of profit or loss question, read the additional information carefully and compute the adjustments needed to eliminate intra-group transactions.
For this question, you need to:
- eliminate the intra-group sale, and
- recognise the provision for unrealised profit (PURP) in closing inventory.
Refer to the intra-group trading adjustment to deepen your understanding if you are not on top of this.
For the intra-group sales, eliminate it by:
Debit: Sales $500,000
Credit: Cost of sales $500,000
(These amounts would be subtracted respectively on the face of the consolidated statement of profit or loss).
For the provision for unrealised profit arising on the intra-group sales: PURP = $500,000 x 40% x 25% = $50,000
Debit : Cost of sales $50,000
Credit: Inventory $50,000
Take your time and prepare the full consolidated statement of profit or loss before proceeding to check the answer.
W3: profit attributable to group and NCI
The consolidated profit for the year must show how much is attributable to the group and to the NCI. Use the steps given earlier to allocate the profit.
| $ | |
|---|---|
| Sunshine Limited’s profit for the year | 420,000 |
| Any adjustment | 0 |
| Adjusted profit | 420,000 |
| Profit attributable to NCI (20%*420,000) | 84,000 |
| Profit attributable to the group (Balancing figure) ($1,610,000 - $84,000) | 1,526,000 |
| Group profit for the year | 1,610,000 |
Moonlight (the parent) was the seller in the intra-group sale, so the PURP adjustment doesn’t touch Sunshine’s own profit. The step 2 hint - reduce the subsidiary’s profit by the PURP - only applies when the subsidiary is the seller, which is why the adjustment here is nil.
Now incorporate the profit allocation into the statement.
Moonlight Group Limited
Consolidated statement of profit or loss for the year ended 31st December 2024.
| $ | |
|---|---|
| Revenue (5,000,000 + 2,000,000 - 500,000) | 6,500,000 |
| Cost of sales (2,000,000 + 800,000 - 500,000 + 50,000) | (2,350,000) |
| Gross profit | 4,150,000 |
| Other income (70,000 + 50,000) | 120,000 |
| Distribution costs (400,000 + 180,000) | (580,000) |
| Administrative expenses (700,000 + 370,000) | (1,070,000) |
| Operating profit | 2,620,000 |
| Profit before financing and income taxes | 2,620,000 |
| Finance costs (200,000 + 100,000) | (300,000) |
| Profit before income taxes | 2,320,000 |
| Income tax expense (530,000 + 180,000) | (710,000) |
| Profit for the year | 1,610,000 |
| Profit attributable to: | |
| NCI ($420,000 * 20%) | 84,000 |
| Owners of parent company ($1,610,000 - $84,000) | 1,526,000 |