Strategic Business Reporting (International) · Group accounting including statements of cash flows

Subsidiaries and the Consolidated Statement of Financial Position

Updated 11 October 2026 · Fact-checked

A consolidated statement of financial position presents a parent and its subsidiaries as one entity. You add 100% of assets and liabilities once control exists under IFRS 10, measure the subsidiary's net assets at acquisition-date fair value, calculate goodwill, show non-controlling interest separately, and eliminate intragroup balances and unrealised profit.

Understand Subsidiaries and Consolidated Statement of Financial Position

A subsidiary is an entity controlled by another entity, the parent. Under IFRS 10, an investor controls an investee when it has power over the investee, exposure or rights to variable returns from it, and the ability to use that power to affect those returns. All three elements must be present. Owning more than half the votes is the usual route to power, but it is not the only one. Potential voting rights, contractual arrangements, or de facto control can also give power. In the exam, read the scenario for board control, veto rights and who directs the relevant activities.

Once control exists, the group is treated as a single economic entity. You take the parent's figures and add 100% of the subsidiary's assets and liabilities line by line, even if the parent owns only 70%. The part you do not own is shown as non-controlling interest (NCI) within equity. The parent's investment in the subsidiary is removed and replaced by the subsidiary's underlying net assets and goodwill.

Acquisition accounting is under IFRS 3. The subsidiary's identifiable assets and liabilities are measured at fair value at the acquisition date, not at book value. This often creates a fair value adjustment, such as land worth more than its carrying amount. Goodwill is the excess of what was paid, plus the NCI, over those fair value net assets. NCI at acquisition can be measured at fair value (the full method) or at its proportionate share of identifiable net assets (the partial method). The choice is made for each acquisition. Under the full method, goodwill includes the NCI's share of goodwill.

After acquisition, only post-acquisition profits of the subsidiary belong in group reserves. Fair value uplifts on depreciable assets cause extra depreciation in the group. Transactions between group companies must be removed. Intragroup receivables and payables cancel. Profit on goods still held in group inventory is unrealised, so you remove it. For a sale by the parent (downstream), the whole adjustment falls on group retained earnings. For a sale by the subsidiary (upstream), it is shared between the group and the NCI.

In SBR you also need to explain your treatment. Examiners ask why an entity is or is not a subsidiary, why fair value is used, or what the effect of a policy choice is. Calculations earn marks, but clear reasoning linked to the scenario earns the rest.

Key rules to remember

Control (IFRS 10): Control = power over investee + exposure to variable returns + ability to use power to affect returns; All three must be present. Reassess if facts and circumstances change.
Goodwill (full method): Goodwill = consideration transferred + NCI at fair value − fair value of identifiable net assets at acquisition; NCI at acquisition is its fair value, usually a share price or valuation given in the question.
Goodwill (partial method): Goodwill = consideration transferred + (NCI % × fair value of identifiable net assets) − fair value of identifiable net assets; Goodwill then relates only to the parent's share.
Fair value of net assets at acquisition: Net assets = share capital + reserves at acquisition + fair value adjustments; Include any fair value adjustment on assets, liabilities and identifiable intangibles. Note any related deferred tax if the question gives a rate.
NCI at reporting date: NCI = NCI at acquisition + NCI % × post-acquisition profit of subsidiary (after fair value depreciation and unrealised profit on upstream sales) − NCI share of any goodwill impairment (full method only); Use the subsidiary's adjusted post-acquisition profit.
Group retained earnings: Parent's retained earnings + parent % × subsidiary's post-acquisition retained earnings (adjusted) − parent's share of goodwill impairment − downstream unrealised profit; Adjust the subsidiary's reserves before taking the parent's share.
Unrealised profit in inventory: URP = inventory still held × profit margin on selling price (or mark-up ÷ (100 + mark-up) if on cost); Check whether the profit is given as margin or mark-up before you calculate.

How to solve Subsidiaries and Consolidated Statement of Financial Position questions

Use the same sequence for any consolidated statement of financial position question. Set out working headings first so you can pick up method marks even if a number is wrong.

1Decide whether control exists. Check voting rights, board power, rights over key decisions and returns. State your conclusion briefly if the scenario is unclear.
2Write the group structure: percentage held, acquisition date, consideration, and the subsidiary's net assets at acquisition and at the reporting date.
3Prepare the net assets working for the subsidiary: share capital, reserves, fair value adjustments, extra depreciation, and any unrealised profit on upstream sales, at acquisition and at the reporting date.
4Calculate goodwill using the method the question specifies (full or partial). Then deal with any impairment of goodwill and allocate it correctly.
5Calculate NCI at the reporting date: NCI at acquisition plus its share of post-acquisition adjusted profit, less its share of any impairment under the full method.
6Calculate group retained earnings using the parent's share of post-acquisition profit, then deduct downstream unrealised profit and the parent's share of impairment.
7Eliminate intragroup balances, such as receivables and payables, and unrealised profit in inventory or non-current assets. Allow for cash or inventory in transit if mentioned.
8Add together line by line: parent plus 100% of subsidiary plus fair value adjustments plus goodwill, less eliminations. Remove the investment in the subsidiary. Then check that the statement balances.

Quickest way: Net assets table and goodwill box

When to use it: Use this when time is short and the question has one subsidiary with fair value adjustments and an intragroup sale.

Draw a three-column table for the subsidiary: at acquisition, at reporting date, and movement (post-acquisition). Fill in share capital, retained earnings, fair value adjustment and unrealised profit.
Take the acquisition column total as net assets for the goodwill calculation. Write the goodwill formula once and fill it in.
Take the movement column total. The parent's share goes to group retained earnings, and the NCI share goes to NCI.
Handle unrealised profit on a separate line. Deduct downstream profit from the parent's reserves and upstream profit in the table.
Build the statement of financial position last. Add assets and liabilities line by line, then use the reserves and NCI figures already calculated.

Common mistakes in Subsidiaries and Consolidated Statement of Financial Position

Using the subsidiary's book values instead of fair values at acquisition when calculating goodwill.
Students copy net assets from the subsidiary's statement of financial position and forget the fair value note in the question.
Fix: Always add a fair value adjustment line to the net assets table. Read the question for any asset worth more or less than its carrying amount.
Taking only the parent's percentage of the subsidiary's assets and liabilities.
It is confused with proportionate consolidation, which IFRS 10 does not use for subsidiaries.
Fix: Add 100% of each line for a subsidiary. Show the outside share in NCI.
Applying the full-method NCI (fair value) in a partial-method calculation, or the reverse.
Students do not check which NCI measurement basis the question requires.
Fix: Write the basis at the top of the goodwill working. If a fair value of NCI is given and the question allows a choice, use it for the full method only.
Putting all unrealised profit against group retained earnings when the sale was by the subsidiary.
Students forget that the seller's profit belongs partly to the NCI.
Fix: Downstream (parent sells): adjust parent's reserves only. Upstream (subsidiary sells): adjust the subsidiary's reserves, so the NCI absorbs its share.
Forgetting extra depreciation on a fair value uplift, or leaving it out of the post-acquisition movement.
The uplift is dealt with at acquisition and then ignored.
Fix: If the uplifted asset is depreciated, include the extra charge in the subsidiary's net assets at the reporting date and in post-acquisition profit.
Mixing up mark-up and margin when calculating unrealised profit.
Both are shown as percentages, and students apply the percentage to the selling price whichever it is.
Fix: Mark-up on cost of 25% means profit is 25/125 (or 20%) of selling price. Margin is already based on selling price.

Worked examples

Example 1

P acquired 80% of S on the acquisition date for $60m cash. At that date S had share capital of $10m and retained earnings of $30m. Land in S had a fair value $8m above its carrying amount. The fair value of the 20% NCI at acquisition was $13m. At the reporting date S's retained earnings are $50m. Ignore deferred tax and impairment, and assume the land is not depreciated. Calculate goodwill under the full method and under the partial method, and NCI at the reporting date under each method.

Show the solution

Net assets at acquisition at fair value = 10 + 30 + 8 = $48m.
Full method goodwill = 60 + 13 − 48 = $25m.
Partial method NCI at acquisition = 20% × 48 = $9.6m.
Partial method goodwill = 60 + 9.6 − 48 = $21.6m.
S's post-acquisition profit = 50 − 30 = $20m. The land is not depreciated, so no adjustment is needed. NCI share = 20% × 20 = $4m.
NCI at reporting date, full method = 13 + 4 = $17m.
NCI at reporting date, partial method = 9.6 + 4 = $13.6m.

Answer: Goodwill is $25m (full) or $21.6m (partial). NCI at the reporting date is $17m (full) or $13.6m (partial).

Example 2

P owns 80% of S. During the year P sold goods to S for $20m at a margin of 25% on selling price, and half of these goods remain in S's inventory at the year-end. S sold goods to P for $15m at a mark-up of 25% on cost, and 40% of these goods remain in P's inventory at the year-end. Calculate the adjustments to consolidated inventory, group retained earnings and NCI.

Show the solution

Downstream unrealised profit (P to S): inventory still held = 20 × 1/2 = $10m. Profit = 10 × 25% = $2.5m.
Upstream: inventory still held = 15 × 40% = $6m. Profit = 6 × 25/125 = $1.2m.
Consolidated inventory falls by 2.5 + 1.2 = $3.7m.
Downstream profit of $2.5m is deducted entirely from group retained earnings, because P made the sale.
Upstream profit of $1.2m is deducted from S's reserves. The NCI bears 20% × 1.2 = $0.24m.
The group bears the remaining 80% × 1.2 = $0.96m. Total group retained earnings reduction = 2.5 + 0.96 = $3.46m.
Check: 3.46 + 0.24 = $3.70m, which equals the inventory reduction.

Answer: Consolidated inventory is reduced by $3.7m, group retained earnings by $3.46m and NCI by $0.24m.

Exam tips

Read the question for the NCI measurement basis and the fair value information before you start. Missing either costs several marks.
Show every working with a clear heading. Even when the final figure is wrong, markers can give credit for correct method.
Where control is unclear, say which of the three IFRS 10 elements is present or missing and use the facts from the scenario. Do not just quote the definition.
Keep a short list of the usual adjustments: fair value, extra depreciation, intragroup balances, unrealised profit, goodwill impairment. Tick them off before you build the final statement.
The reporting and ethics question may ask you to explain the effect of a treatment on the group's figures. Practise a sentence or two on why fair value is used and why unrealised profit is removed.

Practice questions from Group accounting including statements of cash flows

Subsidiaries and Consolidated Statement of Financial Position in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Subsidiaries and Consolidated Statement of Financial Position: frequently asked questions

What are the three elements of control in IFRS 10?

The investor must have power over the investee, exposure or rights to variable returns from its involvement, and the ability to use its power to affect those returns. All three must be present. Holding over half the voting rights usually gives power, but you still need to check the facts.

What is the difference between the full and partial goodwill methods?

Under the full method, NCI is measured at fair value at acquisition, so goodwill includes the NCI's share of goodwill. Under the partial method, NCI is its proportionate share of identifiable net assets, so goodwill relates only to the parent's share. The choice is made for each business combination.

Why do we use fair values at acquisition rather than book values?

IFRS 3 requires the acquirer to measure identifiable assets and liabilities at fair value on the acquisition date. This reflects the amount the group actually paid for those net assets. Using book values would misstate both goodwill and the later depreciation charge.

How do I remove unrealised profit on intragroup sales?

Work out the profit element in inventory still held by the buyer at the year-end, then reduce inventory by that amount. If the parent sold the goods, deduct it from group retained earnings. If the subsidiary sold them, deduct it from the subsidiary's reserves, so NCI takes its share.