This chapter explains the consolidation procedures used to prepare consolidated financial statements.

Learning objectives

By the end of this chapter, you should be able to explain the consolidation procedures used in preparing consolidated financial statements.

The consolidated (group) financial statements

Consolidated (group) financial statements present the assets, liabilities, equity, income, expenses, and cash flows of the parent and its subsidiaries as if they belong to a single economic entity (IFRS 10).

Definitions

Component of consolidated financial statement

A complete set of consolidated financial statements includes:

• Consolidated statement of financial position
• Consolidated statement of profit or loss and other comprehensive income
• Consolidated statements of changes in equity
• Consolidated cash flow statement
• Disclosure notes

Note: At this point, you should know the purpose of each of these financial statements and what each one reports. This syllabus focuses on the first two (2) financial statements.

Consolidation procedure

In Module 7 of this course, you were introduced to preparing the statement of financial position, the statement of profit or loss and comprehensive income, and the statement of cash flows, including disclosure notes. Consolidated financial statements follow the same general principles.

The key difference is that consolidation involves two or more entities: the parent and one or more subsidiaries. Their separate financial statements must be consolidated (i.e., combined) so the group is presented as a single economic entity. IFRS 10 provides guidance on how consolidation should be performed.

Definitions

The consolidation process involves:

1. Combining the assets, liabilities, equity, income, expenses, and cash flows of the parent with those of its subsidiaries.
2. Offsetting (eliminating) the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary.
3. Eliminating in full intra-group assets and liabilities, equity, income, expenses, and cash flows relating to transactions between entities of the group.

Workings required

Before preparing consolidated financial statements (especially the consolidated statement of financial position), you must:

• apply all steps in the acquisition method, and
• adjust for all intra-group transactions.

These steps are organised into systematic standardized workings. You complete these workings first, and then apply the consolidation procedures.

Definitions

Workings 1: Group structure

Identification of the acquire and acquisition date as per the acquisition method is presented here. In addition, it shows the reporting date and post-acquisition period.

Working 2: Net assets (NA) computation

The net asset of the subsidiary at both acquisition date and reporting date is presented here. Note that any fair value adjustment on PPE is presented here. The difference between the NA amounts for the two dates gives post-acquisition profit.

Post-acquisition profit

The profit arising after the acquisition date.

Pre-acquisition profit

Any profit made before the acquisition date.

On the reporting date, any post-acquisition profit must be shared between the parent (see workings 5) and the NCI (see workings 4) in their respective percentage voting rights and presented on the face of the consolidated financial statements.

In a typical question, the post-acquisition profit will be the difference between the retained earnings at the acquisition date and at the reporting date. Otherwise, that would be given as the profit for the year (except where there is an acquisition during the financial year).

Definitions

Workings 3: Goodwill computation

Computes the goodwill at acquisition and reporting.

Workings 4: NCI computation

NCI at both acquisition and reporting is computed here.

W5: Group retained earnings

The profit that relates to the group is presented here. It is a function of the parents 100% retained earnings, parent’s % share of the post-acquisition profit, and any adjustments for provision for unrealised profit.

W6: Other adjustments

All other adjustments, including provision for unrealised profit and*** intra-group balances***, could be presented here.

Note: Before you proceed, make sure you understand the steps and issues covered under the acquisition method of accounting for business combinations, as well as intra-group trading adjustments. WARNING: Don’t proceed until you have a full understanding and mastery of the issues previously treated related to the following:

• Acquisition method
• Goodwill
• Non-Controlling Interest (NCI)
• Fair Value Adjustments of PPE
• Intragroup transactions - PURP and Intragroup balances

Once you can confidently apply these concepts and handle them when they arise, you can move on to the next chapters, which illustrate the consolidation procedures.

This module is examined practically, so you’ll need to practise the workings repeatedly until the process becomes familiar and you can prepare consolidated statements accurately.

Refer to ACCA technical write-up on preparing basic consolidated financial statements written by a member of the examination team. Use it as a revision before you proceed to the next chapter.