slide 24.1 preparation of consolidated statements of comprehensive income, changes in equity and...
TRANSCRIPT
Slide 24.1
Preparation of Consolidated Statements of Comprehensive
Income, Changes in Equity and Cash Flows
Chapter 24
Slide 24.2
By the end of this chapter, you should be able to: • prepare a consolidated statement of comprehensive income;• eliminate inter-company transactions from a consolidated statement of comprehensive income;• attribute comprehensive income to the non-controlling shareholders;• prepare a consolidated statement of changes in equity;• prepare a consolidated statement of cash flows.
Objectives
Slide 24.3
Consolidated income statements
• Treatment in consolidated income statement of:
– Unrealised profit on inter-company inventories
– Pre-acquisition profits
– Dividends or interest paid out of pre-acquisition profits
– Adjustment required when a subsidiary is acquired part of the way through the year.
Slide 24.4
Example: Ante Group – pp.620-623 (pp.431-434)
At the date of acquisition on 1 January 20X2
• Ante acquired
– 75% of the common shares and
– 20% of the preferred shares in Post plc
• The retained earnings of Post were £30,000
• Ante paid £10,000 more than the fair value of the net assets acquired.
Slide 24.5
During the year ended 31 December 20X2
Ante had sold Post goods at their cost price of £9,000 plus a mark up of a third
At the end of the financial year on 31 December 20X2
Half of these goods were still in the inventory at the end of the year
20% is to be written off goodwill as an impairment loss.
Example – Ante Group (Continued)
Slide 24.6
Statement of comprehensive income for the year ended 31 December 20X2
Ante £ Post £ Consolidated £
Sales 200,000 120,000 308,000 Notes 1/3Cost of sales 60,000 60,000 109,500 Notes 1/2/3Gross profit 140,000 60,000 198,500Expenses 59,082 40,000 99,082 Note 4Impairment of goodwill 2,000 Note 5Profit from operations80,918 20,000 97,418
Example – Ante Group (Continued)
Slide 24.7
Ante example – Note 1
1. Eliminate inter-company sales on consolidationCancel the inter-company sales of 12,000 (9,000 + 1/3) by(i) Reducing the sales of Ante from 200,000 to 188,000
and(ii) Reducing the cost of sales of Post by the same
amount from 60,000 to 48,000
Slide 24.8
Ante example – Note 2 2. Eliminate unrealised profit on inter-company
goods that were still in inventory (i) Ante had sold the goods to Post at a mark up 3,000 (ii) Half the goods remain in the inventories of Post at the
year-end (iii) From the Group’s view there is an unrealised profit of
half of the mark up, that is 1,500. Therefore: – Deduct 1,500 from the gross profit of Ante by
adding this amount to the cost of sales – Add this amount to a provision for unrealised profit – Reduce the inventories in the consolidated
statement of financial position by the amount of the provision (as explained in the previous chapter).
Slide 24.9
Ante example – Notes 3 to 5
Slide 24.10
Ante example – Note 6
6. Accounting for the inter-company dividends(i)The common dividend 3,750 received by Ante is 75% of the 5,000 dividend payable by Post(ii)Cancel the inter-company dividend receivable by Ante with 3,750 dividend payable by Post, leaving the 1,250 dividend payable by Post to the non-controlling interest (the 1,250 will be included in the consolidated statement financial position non-controlling interest figure)(iii)The preferred dividend of 600 received by Ante is 20% of the 3,000 payable by Post(iv)Cancel 600 preferred dividend receivable by Ante with 600 of the preferred dividend payable by Post(v)The balance of 2,400 remaining is payable to the non-controlling interest and 2,400 will be included in the consolidated statement of financial position non-controlling interest figure.
Slide 24.11
Ante example – Note 7
Slide 24.12
Ante example – Note 8
£
Slide 24.13
Ante SOCE
Slide 24.14
Ante SOCE (Continued)
Slide 24.15
Ante SOCE (Continued)
Note 2: Opening balance for non-controlling shareholders
54,000 x 25% = 13,500. The relevant percentage to use is 25% because only ordinary shareholders will have any interest in retained profits.
Note 3: Dividends paid In the Ante Group column the dividends paid are those
of the parent only. The parent share of Post dividends is cancelled by Ante’s investment income. Non-controlling share is dealt with in their column. Non-controlling shareholders dividends are 25% of 5,000 + 80% of 3,000
Slide 24.16
Adjustment where non-current asset is acquired from a subsidiaryDigdeep plc is a civil engineering company
that has a subsidairy, Heavylift plc that manufactures digging equipment
Assume that at the beginning of the financial year Heavylift sold equipment costing £80,000 to Digdeep for £100,000
It is Digdeep’s depreciation policy to depreciate at 5% using the straight line method.
Slide 24.17
On consolidation, the following adjustments are required:Revenue is reduced by £20,000 and the asset is reduced
by £20,000 to bring the asset back to its cost of £80,000Revenue is then reduced by £80,000 and cost of sales
reduced by £80,000 to eliminate the intra-group saleDepreciation needs to be based on the cost of £80,000
by crediting depreciation and debiting the accumulated depreciation. The depreciation charge was £5,000 (5% of £100,000), it should be £4,000 (5% of £80,000) so the adjustment is:
DR: Accumulated depreciation £1,000
CR: Depreciation in the statement of income £1,000
Revenue adjustment
Slide 24.18
Subsidiary acquired part way through year
Restrict profits recognised in consolidated accounts Only include post acquisition profit.
Slide 24.19
Tight example – pp.625-627 (pp.435-437)
At the date of acquisition on 30 September 20X1
Tight acquired 75% of the common shares and
20% of the 5% bonds in Loose
The retained earnings of Loose were £69,336
Tight paid £10,000 more than the book valueof the net assets acquired The book value and fair value were the same.
Slide 24.20
During the year All income and expenses accrued evenly
Dividend receivable may be apportioned ona time basis
On 30 June 20X0 Tight sold Loose goods for £4,000 plus a mark-up of one-third.
Tight example (Continued)
Slide 24.21
At the end of the financial year Tight prepares consolidated accounts at 31 December
Half of intra-group goods were still in stock.
Tight example (Continued)
Slide 24.22
Tight income statements
£ £ £
Slide 24.23
Tight income statements (Continued)
Slide 24.24
Tight – Notes 1 to 3
Slide 24.25
Tight – Note 4
4. Accounting for inter-company interest
The interest receivable by Tight is apportioned on a time basis, 9/12 2,000 1,500 is treated as being pre-acquisition and deducted from the cost of the investment in Loose.
The remainder (£500) is cancelled with £500 of the post-acquisition elements of the interest payable by Loose. The interest payable figure in the consolidated financial statements will be the post-acquisition interest less the inter-company elimination which represents the amount payable to the holders of 80% of the bonds.
Total interest payable 10,000 pre-acquisition 7,500 inter-company 500 £2,000
Slide 24.26
Tight – Notes 5 and 6
5. Accounting for inter-company dividendsAmount receivable by Tight
= 3,600The dividend receivable by Tight is apportioned on a time basis, thepre-acquisition element is credited to the cost of the investment in Tight’sbalance sheet, that is 9/12 3,600
= (2,700)The post-acquisition element is cancelled with part of the dividend payablein Loose’s income statement prior to consolidation = (900)Amount credited to consolidated income statement
NIL
6. Aggregate the tax figuresThis includes the whole of the parent’s tax and the time apportionedsubsidiary’s tax, that is 14,004 + (6,000 3/12)
= £15,504The group taxation is that of Tight plus 3/12 of Loose
£
Slide 24.27
Tight – Note 7
Slide 24.28
Tight – published format
Slide 24.29
Tight – published format (Continued)
Slide 24.30
Subsidiary acquired during the year
Slide 24.31
Review questions
1. Explain why the dividends deducted from the group in the statement of changes in equity are only those of the parent company.
2. Explain how unrealised profits arise from transactions between companies in a group and why it is important to remove them.
3. Explain why it is necessary to apportion a subsidiary’s profit or loss if acquired part way through a financial year.
4. Explain why dividends paid by a subsidiary to a parent company are eliminated on consolidation.
Slide 24.32
5. Give five examples of inter company income and expense transactions that will need to be eliminated on consolidation and explain why each is necessary.
6. A shareholder was concerned that following an acquisition the profit from operations of the parent and subsidiary were less than the aggregate of the individual profit from operations figures. She was concerned that the acquisition, which the directors had supported as improving earnings per share, appeared to have reduced the combined profits.She wanted to know where the profits had gone.Give an explanation to the shareholder.
Review questions (Continued)