Learning Outcomes
After reading this article, you will be able to prepare a consolidated statement of financial position (CSFP) for a simple group. You will know how to calculate and present goodwill and non-controlling interests, apply key consolidation workings, and eliminate intra-group receivables, payables, loans, and unrealised profits per ACCA assessment requirements.
ACCA Financial Reporting (FR) Syllabus
For ACCA Financial Reporting (FR), you are required to understand how group financial statements are prepared. This article helps you revise the following key exam areas:
- Prepare a consolidated statement of financial position for a group comprising a parent and up to two subsidiaries
- Calculate and present group goodwill and account for goodwill impairment
- Compute and present non-controlling interests at reporting date (fair value and proportionate methods)
- Eliminate intra-group receivables and payables
- Eliminate intra-group loans and investments
- Remove unrealised profit on intra-group inventory and non-current asset transfers
- Recognise and allocate fair value adjustments on acquisition
- Adjust for pre- and post-acquisition reserves and group retained earnings
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is replaced in the group statement of financial position when consolidating a parent's investment in a subsidiary?
- Which two items must be added together when calculating goodwill on acquisition?
- True or false? The share capital presented in the consolidated statement of financial position always equals only the parent's share capital.
- How is unrealised profit on inventory handled in consolidated accounts if goods remain within the group at year-end?
- What are the two main methods for calculating non-controlling interest, and what additional adjustment is required when the fair value method is used?
Introduction
Consolidated financial statements present the financial position of a parent company and its subsidiaries as if they are a single economic entity. In preparing the consolidated statement of financial position, intra-group balances and profits must be eliminated, goodwill and non-controlling interests must be calculated, and appropriate adjustments for fair value and group reserves are required. This ensures that users of the consolidated financial statements see only the group's assets, liabilities, and equity with third parties, not internal transactions or profits.
Key Term: consolidated statement of financial position
A financial statement that presents the combined assets, liabilities, and equity of a group (parent and subsidiaries) with all intra-group balances and transactions eliminated.
Principles of Group Statement of Financial Position
The consolidated statement of financial position (CSFP) combines all the assets and liabilities of the parent and subsidiaries, with adjustments ensuring the substance of the group’s position is presented. The investment in subsidiaries in the parent’s records is replaced by the fair value of the identifiable net assets of the subsidiary. Only the parent’s share capital appears in the CSFP; the subsidiary’s share capital is never included.
The following elements are essential:
- Goodwill: The excess of the consideration paid (plus non-controlling interest at acquisition) over the fair value of the subsidiary’s net identifiable assets at acquisition.
- Non-Controlling Interest (NCI): The share of the subsidiary’s net assets not owned by the parent.
- Group Reserves: Only post-acquisition movements in reserves are taken into group retained earnings; pre-acquisition reserves are not included.
- Intra-Group Eliminations: Intra-group receivables, payables, loans, and unrealised profits must be eliminated so the consolidated statement reflects the group as if it were a single company.
Key Term: goodwill
The excess of the fair value of consideration paid and NCI at acquisition over the fair value of the subsidiary's net assets at the date of acquisition.Key Term: non-controlling interest
The portion of the subsidiary’s net assets and profits attributable to shareholders other than the parent. Measured either at fair value or as a proportion of net assets.
Standard Consolidation Workings
In the exam, systematic workings underpin correct group statement preparation:
- (W1) Group Structure: Identify the percentage of shares acquired, the acquisition date, and resultant pre- and post-acquisition reserves.
- (W2) Net Assets of Subsidiary: Calculate the subsidiary's net assets at both acquisition and reporting date and determine post-acquisition movement for allocation.
- (W3) Goodwill:
- Parent cost of investment (at fair value)
- NCI at acquisition (fair value or proportion of net assets)
- Less: net assets of subsidiary at acquisition
- (W4) Non-Controlling Interest:
- NCI at acquisition
- Plus NCI share of post-acquisition reserves
- Less NCI share of goodwill impairment (if fair value method used)
- (W5) Group Retained Earnings:
- Parent’s retained earnings
- Plus: Parent's share of post-acquisition retained earnings of each subsidiary
- Less: Parent’s share of goodwill impairment and intra-group unrealised profits
Intra-Group Eliminations
Within a group, internal balances and profits do not represent assets or losses for the group as a whole. They must be eliminated:
Receivables and Payables
All amounts owed between group members are removed from consolidated receivables and payables. Only external balances remain in the consolidated statement.
Loans and Investments
Intra-group loans (including accrued interest) and investments must be eliminated. For example, if the parent has a loan receivable from the subsidiary, the matching payable in the subsidiary’s accounts and accruals related to it are all cancelled.
Unrealised Profits on Inventory
When goods are sold between group companies and remain unsold within the group at period-end, profit on these goods is unrealised from the group's standpoint. This profit is removed by reducing group retained earnings and the consolidated inventory balance.
Key Term: provision for unrealised profit
An adjustment to eliminate profit in inventory or non-current assets arising from intra-group transactions, ensuring only realised profits with third parties are recognised.
Unrealised Profits on Non-Current Assets
If a non-current asset is sold by one group company to another at a profit, this profit is unrealised until the asset is sold outside the group. Adjust both group profits and the carrying amount of the asset. Depreciation should also be recalculated based on original group cost for the asset.
Goods and Cash in Transit
When intra-group account balances disagree due to cash or goods in transit at period-end, adjust as if received, then eliminate the reconciled remaining intra-group balance.
Worked Example 1.1
Parent Q owns 80% of Subsidiary R. At year-end, R shows a $12,000 payable to Q. Q records a $12,000 receivable. R sent a $3,000 cash payment before year-end, which Q has not received.
Answer:
Adjust for the cash in transit: add $3,000 to Q’s cash, reduce R’s payable by $3,000. After this, eliminate the $9,000 intra-group receivable and payable in full.
Worked Example 1.2
Parent A sells inventory costing $24,000 to Subsidiary B for $30,000. At year-end, B has $12,000 of this inventory unsold. How do you eliminate unrealised profit, and whose reserves are affected if A is the seller?
Answer:
Profit in closing inventory: $12,000 × ($6,000/$30,000) = $2,400. Deduct $2,400 from group retained earnings (since the parent is seller) and adjust inventory to group cost.
Worked Example 1.3
Subsidiary S sells equipment to Parent P for $40,000. Carrying amount in S was $25,000. At year-end, P holds the asset, depreciated over 5 years. What adjustments are required?
Answer:
Remove the $15,000 unrealised profit from group profits. Depreciate the asset in group accounts based on original carrying amount. Adjust for excess depreciation in future periods.
Exam Warning
A common error is to allocate all unrealised profit adjustments to the parent’s reserves. Always check who sold the goods or asset: if the subsidiary is the seller, the unrealised profit impacts both group reserves and the non-controlling interest proportionally.
Summary
The consolidated statement of financial position replaces the parent’s investment in subsidiaries with the subsidiary’s net assets, including calculated goodwill and non-controlling interests. Internal transactions, receivables, payables, loans, and unrealised profits are eliminated to present the group as a single entity. Systematic consolidation workings and elimination adjustments are essential for ACCA success.
Key Point Checklist
This article has covered the following key knowledge points:
- Explain the purpose and format of the consolidated statement of financial position
- Describe each key consolidation working: group structure, net assets, goodwill, NCI, and group reserves
- Compute consolidated goodwill (including impairment)
- Calculate non-controlling interest using fair value and proportionate methods
- Eliminate intra-group receivables, payables, and loans
- Remove unrealised profits on intra-group inventory and non-current asset transfers
- Identify which reserves are impacted by different intra-group eliminations
Key Terms and Concepts
- consolidated statement of financial position
- goodwill
- non-controlling interest
- provision for unrealised profit