ACCA Applied Skills · Financial Reporting

Preparation of consolidated financial statements for a simple group: formula sheet

Full chapter guide

Key formulas

Control (IFRS 10): Control = Power + Exposure to variable returns + Ability to use power to affect returns; All three elements must be present. Missing one means no control.
Usual indicator of a subsidiary: Voting rights > 50% → normally a subsidiary; A rebuttable indicator, not a rule. Control can exist below 50% or be absent above 50%, depending on the facts.
Usual indicator of an associate: Voting rights of 20% to 50% → significant influence is presumed (IAS 28); The 20% threshold is only a presumption that the facts can rebut. Significant influence can exist below 20% (for example with board representation) and may be absent at 20% or more. It is not control. Use the equity method.
Consolidation treatment: Subsidiary: 100% line by line, with NCI. Associate: equity method. Other investment: IFRS 9 financial asset; Match the accounting treatment to the level of influence.
Reporting date and policies: Same reporting date and uniform accounting policies across the group; Adjust the subsidiary's figures where policies differ.
Goodwill: Goodwill = Consideration transferred + NCI at acquisition − Fair value of net assets of subsidiary at acquisition; NCI at acquisition is either its share of net assets (proportionate method) or fair value (full goodwill method). Use the method the question tells you.
NCI at the reporting date: NCI = NCI at acquisition + NCI % × post-acquisition profit of subsidiary; Under the proportionate method, NCI at acquisition = NCI % × net assets at acquisition. Under the fair value method, use the given fair value of the NCI.
Group retained earnings: Group RE = Parent RE + Parent % × post-acquisition RE of subsidiary (− any goodwill impairment, parent's share); Post-acquisition RE = subsidiary RE at reporting date − subsidiary RE at acquisition. Impairment of full goodwill is shared with NCI.
Net assets table: Share capital + Reserves = Net assets, at acquisition and at reporting date; The difference between the two columns is the post-acquisition profit.
Group share capital: Group share capital and share premium = Parent's only; The subsidiary's share capital is eliminated against the investment.
Consolidated assets and liabilities: Parent + Subsidiary (100%) ± fair value adjustments ± consolidation adjustments; Remove intragroup balances and unrealised profit in inventory.
Goodwill (full method): Goodwill = Consideration + NCI at fair value − Fair value of net assets at acquisition; NCI fair value is usually NCI shares × share price at acquisition date.
Goodwill (proportionate method): Goodwill = Consideration + (NCI % × Fair value of net assets) − Fair value of net assets; Equivalent to the parent's share of goodwill only.
Net assets at acquisition: Share capital + Reserves at acquisition + Fair value adjustments; Fair value adjustments are uplifts or reductions to carrying amounts at the acquisition date.
Bargain purchase: If net assets > consideration + NCI, the excess is a gain in profit or loss; Reassess first. No goodwill is recognised.
Impairment of goodwill (full method): Impairment is shared between parent and NCI in proportion to their shares; Under the proportionate method, only the parent's share of the impairment is recognised.
Fair value adjustment on consolidation: Dr/Cr asset by (fair value − carrying amount) at acquisition; adjust depreciation after acquisition; Adjust the net assets at acquisition and at the reporting date.
Intragroup sales: Consolidated revenue = P revenue + S revenue − intragroup sales; consolidated cost of sales = P + S − intragroup purchases (plus PUP increase); Remove the full invoiced amount, not just the profit.
Unrealised profit on markup: PUP = inventory still held × markup ÷ (100 + markup); Use when the profit is a percentage of cost. Example: markup 25% gives 25/125 = 1/5 of selling price.
Unrealised profit on margin: PUP = inventory still held × margin %; Use when the profit is a percentage of selling price.
PUP, parent sells: Dr Retained earnings of P; Cr Group inventory; No effect on NCI.
PUP, subsidiary sells: Dr S's post-acquisition reserves (full PUP); Cr Group inventory; The full PUP is deducted in S's net assets and post-acquisition reserves. It is then shared between the group and NCI in their holdings. NCI share of net assets = NCI % × S net assets at reporting date after PUP (plus NCI goodwill if full goodwill is used).
Goods in transit: Dr Inventory; Cr Payables (receiving company) before cancelling; Then cancel the intragroup receivable and payable. Add the PUP if the goods are still unsold.
Cash in transit: Dr Cash; Cr Receivables (receiving company) before cancelling; Then cancel the intragroup balances.
Group revenue and costs: Parent + Subsidiary (from acquisition date) − intragroup items; Apply the same rule to each line. Always include 100% of the subsidiary, not just the parent's share.
Intragroup sales: Deduct intragroup sales from revenue AND the same amount from cost of sales; This has no effect on group profit. Only the unrealised profit adjustment changes profit.
Unrealised profit in closing inventory (mark-up): URP = inventory still held (at transfer price) × mark-up ÷ (100 + mark-up); For a 25% mark-up use 25/125 = 1/5. Add the URP to cost of sales.
Unrealised profit in closing inventory (margin): URP = inventory still held (at transfer price) × margin on selling price; If the margin is 20% of selling price, URP is 20% of the inventory still held.
Time apportionment for mid-year acquisition: Subsidiary's post-acquisition results = full-year results × months owned ÷ 12; Use only if income and costs accrue evenly. Follow any other information in the question.
NCI share of profit: NCI = NCI % × subsidiary's profit for the year (post-acquisition, adjusted); Adjust the subsidiary's profit first for fair value depreciation and unrealised profit on goods the subsidiary sold to the parent. Do not use the parent's profit.
NCI share of total comprehensive income: NCI share of TCI = NCI % × subsidiary's total comprehensive income (post-acquisition); Subsidiary's TCI = its profit + its OCI.
Owners of the parent: Owners' share = group profit (or TCI) − NCI share; The two shares must add back to the group total.
Subsidiary post-acquisition retained earnings: Subsidiary retained earnings at reporting date − subsidiary retained earnings at acquisition; Use adjusted figures. Include any fair value depreciation and unrealised profit where the subsidiary is the seller.
Consolidated retained earnings: Parent retained earnings + parent % × (subsidiary post-acquisition retained earnings, adjusted) − group's share of goodwill impairment (100% if NCI is proportionate) − other group adjustments; Other adjustments include unrealised profit where the parent is the seller, and any correction of the parent's own figures.
Unrealised profit in closing inventory: Inventory still held × profit ÷ selling price (if a margin) or × mark-up ÷ (100 + mark-up); Margin is on sales. Mark-up is on cost. Check which one the question gives.
Net assets at acquisition: Share capital + reserves at acquisition date + fair value adjustments; Used in goodwill. Pre-acquisition reserves never go into group reserves.
Fair value depreciation: Fair value uplift ÷ remaining useful life × years since acquisition; Reduces the subsidiary's post-acquisition profit.

Quick revision

Control means power over the investee, exposure to variable returns and the ability to use power to affect those returns.
Consolidate 100% of subsidiary assets, liabilities, income and expenses, then show NCI for the part not owned.
Goodwill = consideration + NCI at acquisition − fair value of net assets at acquisition.
NCI may be measured at fair value or at its share of net assets; the choice changes goodwill and NCI.
Fair value adjustments at acquisition change net assets, and any extra depreciation then affects post-acquisition profit.
Cancel intragroup receivables, payables, sales and purchases in full.
Unrealised profit in closing inventory is removed in full from inventory and charged to the seller's profit.
If the parent sold the goods, the unrealised profit adjustment goes against the parent's profit; if the subsidiary sold, it is shared with NCI.
Group retained earnings = parent's retained earnings + parent's share of the subsidiary's post-acquisition profits (after fair value depreciation and impairment), less all downstream unrealised profit and the parent's share of upstream unrealised profit.
Goodwill impairment is charged wholly to the group when NCI is measured at its proportionate share of net assets. It is shared between the parent and NCI when NCI is measured at fair value.
NCI in profit is NCI percentage × the subsidiary's adjusted profit after tax for the year.
An associate is shown as one line: cost plus share of post-acquisition profit, less impairment and unrealised profit adjustments.
Associate income is shown as one line in profit or loss; its items are not added line by line.

Common mistakes

Deciding control from the percentage alone. Fix: Treat it as an indicator. Always check power, returns and the link between them against the other facts given.
Treating the 20% and 50% thresholds as fixed rules. Fix: They are presumptions. Under IAS 28 the 20% presumption can be rebutted, and significant influence can exist below 20% (for example with board representation). Check the facts.
Adding only the parent's percentage of the subsidiary's assets and liabilities. Fix: Consolidate 100% of assets and liabilities where there is control. The NCI line accounts for the outside share.
Using the subsidiary's net assets at the reporting date in the goodwill calculation. Fix: Goodwill uses net assets at the acquisition date. Reporting date figures are used for NCI and reserves only through post-acquisition profit.
Using net assets at the year end instead of at acquisition. Fix: Always use reserves at the acquisition date from the question. Post-acquisition reserves belong in the retained earnings working.
Ignoring the fair value adjustment or applying it only once. Fix: Include the uplift in net assets at acquisition, and adjust depreciation or later disposal effects in post-acquisition profit.
Calculating PUP on total intragroup sales instead of closing inventory Fix: Apply the profit fraction only to goods still held by the buyer at the year end.
Using the markup percentage as if it were a margin Fix: Markup is on cost, so profit is 25/125 of selling price. Margin is on selling price, so profit is the margin % directly.
Including only the parent's percentage of the subsidiary's revenue and costs (for example 80%). Fix: Include 100% of a subsidiary's income and expenses. The NCI line at the bottom deals with the outside shareholders' share.
Consolidating the subsidiary's full-year results when it was acquired mid-year. Fix: Underline the acquisition date first. Work out months owned ÷ 12 and apply it to every line of the subsidiary's results before adding.

Exam tips

In objective tests, read the facts after the percentage. Examiners often add a board right, option or contract that changes the answer.
When asked to explain control, name all three elements and tie each to a fact in the scenario. Marks go for application, not recitation.
Remember the exemption conditions as a list. A written question may ask which conditions must be satisfied.
Write the classification first (subsidiary, associate or investment), then the treatment. This gives easy marks even if later workings go wrong.
In Section C, state the acquisition date clearly. It decides which results and reserves are consolidated.
In Section C, show the net assets table, goodwill, NCI and retained earnings workings clearly. Markers give credit for correct method even when a figure is wrong.
In objective test questions, read for the method of measuring NCI. Proportionate and fair value methods give different goodwill and NCI.
Always check the balance: net assets must equal total equity including NCI. It catches most errors quickly.