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ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments

Group parent Alder holds a $1,000,000 bond issued by its subsidiary Birch, acquired in the market for $950,000 and classified at amortised cost in Alder's separate statements. Birch carries the bond as a liability at $1,000,000 in its own statements. Which consolidation treatment is correct?

The asset and liability are eliminated on consolidation, and the $50,000 difference between Birch's liability of $1,000,000 and Alder's purchase price of $950,000 is recognised as a gain on extinguishment in group profit or loss, not in equity.

  1. AEliminate the asset and liability, recognising a $50,000 gain in group profit or loss as an extinguishmentCorrect
  2. BLeave both balances in the consolidated statement of financial position
  3. CEliminate only the liability and keep the asset at $950,000
  4. DEliminate the balances against each other with the $50,000 taken directly to retained earnings of the parent

Explanation

Intragroup balances are eliminated on consolidation. From the group's perspective, the liability is effectively extinguished by repurchase, so the difference between the liability carrying amount of $1,000,000 and the price of $950,000 is a $50,000 gain in group profit or loss, with later interest income and expense also eliminated.

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