The consolidation procedures

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

Prerequisites: this chapter builds on the acquisition method, goodwill, NCI, fair value adjustments to PPE and intra-group adjustments (PURP and intra-group balances).

Learning objectives

By the end of this chapter, you should be able to:

• List the three consolidation procedures in IFRS 10.
• Set out the six standard workings (W1 to W6).
• Explain where each working’s result goes in the consolidated statement of financial position and the consolidated statement of profit or loss.

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 (with IFRS 18 subtotals: operating profit, profit before financing and income taxes, and profit before tax) and statement presenting comprehensive income
• Consolidated statement 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

Earlier in this course you prepared a single entity’s statement of financial position and statement of profit or loss. 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.

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 standardised workings. You complete these workings first, and then apply the consolidation procedures.

Definitions

Working 1: Group structure

Identification of the acquirer 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 assets 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.

Definitions

Post-acquisition profit

The profit arising after the acquisition date. It’s usually retained earnings at the reporting date minus retained earnings at the acquisition date; if the acquisition happened during the year, time-apportion the subsidiary’s profit for the year instead (profit × months since acquisition ÷ 12). On the reporting date, it’s shared between the parent (W5) and the NCI (W4) in proportion to their percentage ownership interests (e.g., 80% parent / 20% NCI), not voting rights.

Pre-acquisition profit

Any profit made before the acquisition date.

Definitions

W3: Goodwill computation

Goodwill at acquisition = fair value of consideration transferred (cash and shares) + fair value of NCI at acquisition − fair value of net assets at acquisition (W2). Goodwill impairment is outside the syllabus, so the same figure carries forward to the reporting date.

W4: NCI computation

NCI at reporting date = fair value of NCI at acquisition (the full goodwill method - proportionate-share NCI isn’t examined) + (NCI% × post-acquisition profit from W2), less NCI% of any PURP where the subsidiary is the seller.

W5: Group retained earnings

The profit that relates to the group is presented here. It is a function of 100% of the parent’s retained earnings, the 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.

The table below shows where each working’s result lands in the consolidated statement of financial position (CSFP):

Working	What it produces	Where it goes
W3	Goodwill	Intangible non-current asset in the CSFP
W4	NCI at reporting date	Equity section of the CSFP
W5	Group retained earnings	Equity section of the CSFP
W6 (PURP)	Provision for unrealised profit	Reduces inventory; also adjusts W5 (and W4 if the subsidiary is the seller)
W6 (balances)	Intra-group receivable/payable	Cancelled from receivables and payables

Only the parent’s own share capital and share premium appear in the CSFP - the subsidiary’s share capital and pre-acquisition reserves are eliminated through goodwill (W3).

Example: From workings to the CSFP

Parent acquired 80% of Subsidiary on 1 January 20X4 for $300,000 cash plus $100,000 of shares (total consideration $400,000); the fair value of the 20% NCI at acquisition was $90,000. Subsidiary’s net assets (after a $20,000 upward PPE fair value adjustment) were $350,000 at acquisition and $420,000 at the reporting date. Parent sold goods to Subsidiary at a $5,000 profit, all still in Subsidiary’s year-end inventory (PURP), and Subsidiary owed Parent $15,000 at the reporting date.

• W2 post-acquisition profit: $420,000 − $350,000 = $70,000
• W3 goodwill: $400,000 + $90,000 − $350,000 = $140,000
• W4 NCI at reporting date: $90,000 + (20% × $70,000) = $104,000 - no PURP adjustment, since Parent (not Subsidiary) made the sale
• W5 addition to Parent’s own retained earnings: (80% × $70,000) − $5,000 PURP = $51,000
• W6: cancel the $15,000 intra-group balance from receivables and payables; reduce inventory by $5,000 for the PURP

Consolidation procedures for the statement of profit or loss

The same workings feed into the consolidated statement of profit or loss (CSPL), with these adjustments:

• Add the parent’s 100% and the subsidiary’s 100% of each line item, time-apportioning the subsidiary’s results from the acquisition date if it was acquired mid-year.
• Deduct intra-group sales from both revenue and cost of sales.
• Add any provision for unrealised profit (PURP) to cost of sales.
• Split profit for the year between the owners of the parent and the NCI: the NCI’s share is NCI% × (the subsidiary’s profit for the year, less the PURP if the subsidiary sold the goods), counting only the post-acquisition months if it was acquired mid-year.

The walkthrough questions that follow apply these workings to full questions.