ACCA Applied Skills · Financial Reporting

The concepts and principles of groups and consolidated financial statements: formula sheet

Full chapter guide

Key formulas

Control (IFRS 10): Control = power over investee + exposure to variable returns + ability to use power to affect returns; All three must be present. Usually evidenced by more than 50% of voting rights, but not always.
Significant influence (IAS 28): Holding of 20% or more of voting power → presumed significant influence; A presumption, not a fixed rule. It can be rebutted, and influence can exist below 20% with other evidence.
Typical treatment by holding: Above 50%: subsidiary (consolidate). 20% to 50%: associate (equity method). Below 20%: investment (IFRS 9).; A guide only. Always test control and influence first. Voting power may differ from share capital percentage.
Effective (indirect) holding: Effective interest = parent's % in subsidiary × subsidiary's % in sub-subsidiary; Used for NCI in a vertical group (P → S → T). D-shaped groups need direct and indirect holdings added together. Control is still tested by who has power, not the effective interest.
NCI share: NCI % = 100% − parent's % of equity owned; Applies to full consolidation of a subsidiary only.
Consolidated assets and liabilities: Group line item = Parent + Subsidiary (100%) ± consolidation adjustments; Add every line in full when the parent controls the subsidiary, regardless of the percentage owned.
Goodwill at acquisition: Goodwill = Consideration transferred + NCI + Fair value of previously held interest − Fair value of identifiable net assets at acquisition; NCI at acquisition is measured either at fair value or at its proportionate share of net assets. The question states which to use. The previously held interest term applies only if the parent already held shares before gaining control.
Net assets of subsidiary: Net assets = Share capital + Share premium + Reserves (retained earnings); Compute at the acquisition date and at the reporting date. Include any fair value adjustments in both.
Non-controlling interest at reporting date: NCI = NCI at acquisition + NCI % × Post-acquisition change in subsidiary's net assets − NCI's share of goodwill impairment (fair value method only); Use this for the statement of financial position. The NCI bears its share of any goodwill impairment only under the fair value method. Under the proportionate method no goodwill is attributable to the NCI, so no adjustment is needed.
Group retained earnings: Parent's retained earnings + Parent % × Subsidiary's post-acquisition retained earnings; The subsidiary's pre-acquisition reserves are never included in group reserves.
Group share capital: Group share capital = Parent's share capital only; The subsidiary's share capital is cancelled on consolidation.
Goodwill: Goodwill = Consideration transferred + NCI at acquisition − Fair value of identifiable net assets at acquisition; Use this one layout for both methods. Only the NCI figure changes.
NCI at acquisition (proportionate): NCI = NCI % × fair value of net assets at acquisition; Gives partial goodwill. No goodwill is attributed to NCI.
NCI at acquisition (fair value): NCI = Number of NCI shares × subsidiary share price at acquisition; Gives full goodwill. Use the value given in the question, not the parent's price paid per share.
Net assets at acquisition: Share capital + reserves at acquisition date + fair value adjustments; Include any fair value uplift on assets, and deduct fair value reductions.
NCI at reporting date: NCI at acquisition + NCI % × post-acquisition profit of subsidiary (− NCI share of goodwill impairment under the fair value method); Adjust the post-acquisition profit for fair value depreciation and unrealised profit where relevant.
Consideration transferred: Cash + fair value of shares issued + fair value of deferred consideration; Contingent consideration is also included at fair value. Acquisition costs are expensed, not included.
Fair value adjustment: FV adjustment = fair value − carrying amount at acquisition date; Positive is an uplift, negative is a reduction. Apply it to the subsidiary's net assets at acquisition and at the reporting date.
Net assets at acquisition: Share capital + reserves at acquisition date + FV adjustments; Used in the goodwill calculation.
Additional depreciation on uplift: Uplift ÷ remaining useful life × years since acquisition; Charge it in the subsidiary's post-acquisition profit. The cumulative total reduces net assets at the reporting date.
Post-acquisition profit: Subsidiary reserves at reporting date − reserves at acquisition − cumulative extra depreciation or inventory reversal; Use the adjusted figure to get the parent's share.
Group retained earnings: Parent retained earnings + parent % × adjusted post-acquisition profit of subsidiary; Also adjust for unrealised profit and goodwill impairment where given.
Goodwill: Consideration + NCI − fair value of net assets at acquisition; NCI is measured at fair value or at its proportionate share of net assets.
Unrealised profit (profit as a margin on selling price): URP = intra-group inventory still held (at transfer price) × profit ÷ selling price; Use this when the question gives a margin, for example 25% of selling price.
Unrealised profit (mark-up on cost): URP = inventory still held (at transfer price) × mark-up ÷ (100 + mark-up); A 25% mark-up on cost means profit is 25/125 = 20% of selling price.
Inventory adjustment: Dr Cost of sales (or retained earnings b/f for opening URP), Cr Inventory; Closing URP reduces group inventory. Only the increase in URP over the year is charged to the year's profit.
Eliminating intra-group sales: Dr Revenue, Cr Cost of sales, for the full intra-group sales for the year; Cancel the whole amount sold, not just the part still in inventory. Profit is unaffected by this step.
Cash in transit: Dr Cash, Cr Receivables (or payables), then cancel the agreed balances; Do this before cancelling, so the two sides of the balance agree.
Who bears URP: Parent sells: all URP against the parent's profit. Subsidiary sells: URP against the subsidiary's profit, shared with NCI; The NCI share is calculated on the subsidiary's profit after deducting URP.
Line-by-line consolidation: Group item = Parent + (Subsidiary × months owned ÷ 12) ± adjustments; Applies to revenue, cost of sales, expenses and OCI. Use 100% of the subsidiary regardless of the percentage held.
Intra-group sales: Deduct intra-group sales from revenue and the same amount from cost of sales; This removes the sale and the matching purchase. It does not change profit unless inventory remains unsold.
Unrealised profit in closing inventory: Unrealised profit = Intra-group inventory still held × profit ÷ selling price (margin) or × mark-up ÷ (100 + mark-up); Increase group cost of sales by this amount. Use margin on sales or mark-up on cost correctly.
Fair value depreciation: Extra depreciation = Fair value uplift ÷ remaining useful life × time owned; Charge it to the group's expenses, usually cost of sales or administrative expenses.
Profit attributable to NCI: NCI share = NCI % × (Subsidiary's post-acquisition profit after consolidation adjustments); Adjust for fair value depreciation and for unrealised profit if the subsidiary sold the goods. Do the same for total comprehensive income.
Profit attributable to owners of the parent: Owners' share = Group profit for the year − NCI share; Do the same for total comprehensive income.
Intra-group dividends: Subsidiary dividend received by the parent is excluded from group profit; Remove it from the parent's investment income. The NCI's share of the dividend is not a group expense.
Carrying amount of associate (SOFP): Cost + share of post-acquisition retained earnings (and OCI reserves) − impairment − unrealised profit adjustment (if the parent sells to the associate); Post-acquisition = associate's reserves at the reporting date − reserves at acquisition, multiplied by the group's %.
Share of associate's profit (P&L): Group % × associate's profit after tax for the year (adjusted for unrealised profit where relevant); Shown as one line. Pro-rate for the period of ownership if the associate was acquired part-way through the year.
Unrealised profit in inventory: Profit on the sale × proportion still in inventory at year end; Work out the margin first. Mark-up on cost of 25% is a margin of 20% on selling price.
Group's share of unrealised profit: Unrealised profit × group % holding; Only the group's share is eliminated for an associate, unlike a subsidiary where the whole profit is eliminated.
Investment roll-forward: Opening carrying amount + share of profit after tax (after deducting the group's share of unrealised profit) + share of OCI − dividends received − impairment = closing carrying amount; Useful when the question gives the opening balance rather than the cost. The unrealised profit is deducted within the share of profit, so do not deduct it a second time.
Significant influence presumption: Holding of 20% or more of voting power is presumed to give significant influence; It is a presumption, not an automatic rule. Facts can rebut it, and influence can exist below 20%.

Quick revision

Control under IFRS 10 needs power, exposure to variable returns and the ability to use power to affect returns.
A holding of 20% to 50% of votes normally suggests significant influence, but judge the facts.
Subsidiaries are consolidated line by line at 100% of assets, liabilities, income and expenses.
Goodwill = consideration transferred + NCI + fair value of previously held equity interest (if any) − fair value of identifiable net assets at acquisition.
NCI can be measured at fair value or at its proportionate share of net assets at acquisition.
Fair value adjustments change net assets at acquisition and may need extra depreciation after acquisition.
Group retained earnings = parent's retained earnings + group share of the subsidiary's post-acquisition retained earnings (after fair value depreciation and unrealised profit adjustments) − the parent's share of goodwill impairment (all of it if NCI is measured at proportionate share; the group share only if full goodwill is used), plus or minus other adjustments.
Remove intra-group receivables, payables, sales and purchases in full.
Unrealised profit is eliminated from inventory; with a subsidiary seller it is shared with NCI, with a parent seller it is not.
In the statement of profit or loss, include a subsidiary only from the acquisition date.
An associate is shown as one line in the statement of financial position and one line for share of profit.
Associate carrying amount = cost plus share of post-acquisition profits, less impairment and dividends received.

Common mistakes

Treating 50% or less as never a subsidiary. Fix: Always test the three IFRS 10 elements. Control can exist below 50% if the investor has power through other means.
Treating any holding above 50% as a subsidiary. Fix: Read the scenario for restrictions, such as another party having the right to direct relevant activities. If power is missing, there is no control.
Leaving the investment in subsidiary in the group statement of financial position. Fix: Tick off the investment in your goodwill working. Once it is used there, it must not appear in the group statement.
Adding only the parent's share of the subsidiary's assets, such as 80%. Fix: Add 100% of the subsidiary's assets and liabilities. The NCI line shows the outside owners' claim.
Using book value of net assets instead of fair value at acquisition. Fix: Always scan the question for fair value adjustments and add them to net assets before calculating goodwill.
Using reserves at the reporting date rather than at the acquisition date. Fix: Find the date of acquisition and use the reserves at that date. Underline it in the question.
Ignoring the fair value adjustment in the goodwill calculation. Fix: Always ask whether any asset or liability is not at fair value. Add the adjustment to net assets at acquisition.
Forgetting the extra depreciation on the uplift after acquisition. Fix: If the asset is depreciable, charge uplift ÷ remaining life for each year since acquisition. Reduce post-acquisition profit and reporting date net assets.
Deducting the whole profit on the sale instead of only the profit on the goods still held. Fix: Apply the margin only to goods still in closing inventory. Goods the buyer has sold on outside the group have realised their profit.
Using the mark-up as if it were a margin. Fix: For a mark-up on cost, use mark-up ÷ (100 + mark-up). A 25% mark-up gives a 20% margin, not 25%.

Exam tips

In OT questions, read the scenario for traps such as non-voting shares, options, or another large shareholder before applying any percentage.
Write 'presumed' when you mention 20%, and 'normally' when you mention 50%. Examiners reward this precision.
In written answers, name the three IFRS 10 elements and apply each to the facts. Do not just state the conclusion.
For a group with sub-subsidiaries, draw the structure first and mark each percentage. It prevents multiplication errors.
State the accounting treatment as well as the classification. The next mark is often for saying consolidate, equity account, or IFRS 9.
Draw the net assets table first in every consolidation question. Most marks depend on it, and it helps you avoid mistakes in the later workings.
In OT questions, goodwill, NCI and group reserves are often asked as separate items. Compute all three from one table so they are consistent.
Read the NCI sentence carefully. Fair value of NCI and proportionate share give different goodwill figures.