ACCA Applied Knowledge · Financial Accounting
Subsidiaries for ACCA Financial Accounting: Chapter Guide
A subsidiary is an entity controlled by a parent. In FA you prepare consolidated financial statements as if the group is one entity. Add 100% of the parent's and subsidiary's assets and liabilities, remove the investment, calculate goodwill, show non-controlling interest, and adjust for intragroup balances and unrealised profit.
What this chapter covers
This chapter teaches you how to combine the financial statements of a parent and its subsidiaries into one set of consolidated financial statements. The idea is simple. The group is presented as a single economic entity, so you add together what the parent controls, not just what it owns.
You start with control, because control decides whether you consolidate at all. Then you build the consolidated statement of financial position in a fixed layout: goodwill, then net assets, then equity split between the parent's shareholders and the non-controlling interest. You then add layers: post-acquisition reserves, intragroup trading and unrealised profit, and finally the consolidated statement of profit or loss.
This chapter links to the rest of FA. It uses your knowledge of the statement of financial position, share capital, reserves, inventory and receivables and payables. In the exam it feeds Section B, where one 15-mark multi-task question covers consolidations, and it can also appear in Section A objective test questions. Associates are a related area, so keep the subsidiary method clear in your head so you do not mix them up.
Consolidations is examined in one of the two 15-mark multi-task questions in Section B of FA, and it can also supply Section A questions. It is calculation-heavy but very rule-based. Once you learn the standard workings, you can reproduce them for almost any question. Students who master it gain marks reliably, while those who skip it give away marks on a question that carries real weight. The pass mark is 50%, so strong consolidation marks make a real difference.
Subsidiaries: topics in the order to study them
- 1Group Structure: Parent, Subsidiary and ControlYou must know when a group exists and when to consolidate before you do any calculation.
- 2Consolidated Statement of Financial Position BasicsThis sets the layout and the 100% line-by-line addition that every later topic builds on.
- 3Goodwill on AcquisitionGoodwill is the first main working and needs the layout from the basics to make sense.
- 4Non-controlling InterestOnce goodwill is fixed, you can show the share of net assets belonging to outside shareholders.
- 5Consolidated Reserves and Post-acquisition ProfitsOnly profits earned after acquisition belong in group reserves, and this uses the net asset figures you already know.
- 6Intragroup Trading and Unrealised ProfitThese adjustments change inventory, reserves and NCI, so you need the earlier workings secure first.
- 7Consolidated Statement of Profit or LossApply the same ideas to income and expenses once the statement of financial position is comfortable.
How to prepare Subsidiaries
Treat consolidation as a routine. The same workings appear every time, so your goal is to run them in the same order without thinking.
- Learn the control test first, then read a few short scenarios and decide whether each entity is a subsidiary.
- Memorise the standard workings: group structure, net assets of the subsidiary at acquisition and at the reporting date, goodwill, NCI, and consolidated reserves.
- Write goodwill and NCI out by hand on paper until you can do them from memory. Check the cost of investment, the consideration and the NCI measurement basis stated in the question.
- Add the adjustments one at a time: unrealised profit in inventory, intragroup balances and any fair value changes. After each, check which numbers move and where.
- Practise full consolidated statement of financial position and profit or loss questions under time pressure. Remember that the whole paper is two hours and all questions are compulsory, so you need to move at a steady pace.
- Practise objective test questions on single steps, such as number entry for goodwill or NCI, and review your wrong answers to find the step that failed.
Common mistakes in Subsidiaries
Using the subsidiary's current reserves in the goodwill calculation instead of those at acquisition.
Fix: Label every net asset figure with its date. Goodwill uses acquisition-date figures only.
Including only the parent's percentage of the subsidiary's assets and liabilities.
Fix: Add 100% line by line, then show the outside share separately as NCI.
Putting the whole unrealised profit adjustment in the wrong company's reserves.
Fix: Identify the seller first. If the parent is the seller, deduct the whole unrealised profit from the parent's reserves. If the subsidiary is the seller, deduct it from the subsidiary's profit, so it is shared between the group and NCI.
Leaving intragroup balances or sales in the consolidated statements.
Fix: Scan the question for intragroup items before finalising. Remove both sides, so they cancel.
Including pre-acquisition profits in group reserves.
Fix: Only the parent's share of post-acquisition movement is added to group reserves.
Rushing the objective test options and picking a number that matches a half-finished working.
Fix: Finish the working, then check that your answer answers the exact question: goodwill, NCI or reserves.
Last-day revision: Subsidiaries
- A parent controls a subsidiary. Control normally comes with more than 50% of voting rights, but the test is power over the investee, exposure to variable returns and the ability to use power to affect them.
- Consolidate 100% of the subsidiary's assets, liabilities, income and expenses, even if the parent owns less than 100%.
- Cancel the parent's investment in the subsidiary in the goodwill working, against the subsidiary's net assets at acquisition (share capital and pre-acquisition reserves). The NCI share and goodwill make up the difference.
- Goodwill = consideration transferred + NCI at acquisition − fair value of the subsidiary's identifiable net assets at acquisition.
- NCI at the reporting date = NCI at acquisition + NCI share of the subsidiary's post-acquisition profits.
- Group reserves = parent's reserves + parent's share of the subsidiary's post-acquisition reserves, less group adjustments.
- Post-acquisition profit = subsidiary's reserves now − reserves at acquisition.
- Remove intragroup receivables and payables, which should offset each other. Adjust for cash or inventory in transit if needed.
- Unrealised profit in closing inventory = profit element in the goods still held by the group. Reduce inventory by this amount. If the parent is the seller, deduct the whole amount from the parent's reserves. If the subsidiary is the seller, deduct it from the subsidiary's profit, so it is shared between the group and NCI.
- In the consolidated profit or loss, remove intragroup sales from revenue and the same amount from cost of sales.
- Profit for the year is split between owners of the parent and NCI. NCI takes its share of the subsidiary's profit after adjustments.
Subsidiaries practice questions
- Parent P acquired 80% of S several years ago. At the reporting date S's net assets are $500,000. At acquisition, NCI was measured at its pro…
- P acquired 70% of S on 1 October. The year end is 31 December. For the year S's revenue was $480,000 and cost of sales $300,000, and these a…
- Pillar holds 45% of the voting rights in Stone. The remaining 55% is held by 1,100 shareholders, none holding more than 0.1%. Over the past …
- Parent P sells goods to its subsidiary S at cost plus 25%. At the year end S holds inventory bought from P at a transfer price of $60,000. W…
- Parent P acquired 80% of Subsidiary S on 1 April 20X4. Both have a 31 December year end. For the year ended 31 December 20X4, P's revenue wa…
- Alpha acquired 80% of the equity shares of Beta. In Alpha's consolidated statement of financial position, which of the following describes h…
- Hold acquired 60% of Target for $90,000 when Target's net assets had a fair value of $120,000. Non-controlling interest is measured at fair …
- Alpha acquires 70% of the equity shares of Beta, which carry one vote each. Which of the following statements about the consolidated stateme…
Subsidiaries in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Subsidiaries: frequently asked questions
Do I need to learn the consolidation workings by heart for FA?
Yes, learn the standard layout and the order of the workings. Once you can write goodwill, NCI and reserves from memory, you spend your exam time on the adjustments in the question.
How is the subsidiaries chapter tested in the FA exam?
It appears in the 15-mark multi-task question on consolidations in Section B, and single steps can appear as objective test questions in Section A. You may be asked for goodwill, NCI or a consolidated figure.
What is the difference between a subsidiary and an associate?
A subsidiary is controlled, so you consolidate it line by line. An associate is one where you have significant influence but not control, and it is treated differently. Learn the subsidiary method first so it does not blur with the associate method.
Where should I start if consolidation feels difficult?
Start with control and the basic consolidated statement of financial position with 100% ownership. Add goodwill, then NCI, then each adjustment one at a time.