Chapter 23 Preparation of Consolidated Statements of Financial Position after the Date of Acquisition

Objectives By the end of this chapter, the reader should be able to: account for the post-acquisition profits of a subsidiary; eliminate inter-company balances and deal with reconciling items; account for unrealised profits on inter-company transactions.

Pre- and post-acquisition profits Pre-acquisition profits Made before date in which parent acquired control Represent net assets at acquisition date Are dealt with through goodwill calculation Post-acquisition profits Made after date of acquisition Include consolidated income statement.

Example: Bend Group – pp.606-607 (pp.421-422) 1 January 20X1 Bend acquired 80% of the 10,000 £1 common shares in Stretch plc Investment in Stretch cost £12,000 Retained earnings were £4,000 Fair value of the non-controlling interest at the date of acquisition was £2,950 Fair value of non-current assets was £600 above book value.

The Bend Group statement of financial position at 31 December

The Bend Group goodwill calculation £

Total goodwill calculation £ Fair value of non-controlling interest at date of acquisition 2,950 20% of net assets at date of acquisition (10,000 + 4,000 + 600) (2,920) Goodwill attributable to the non-controlling interest 30 Total goodwill (£320 + £30) 350

The Bend Group non-controlling interest calculation £ Non-controlling interest in goodwill 30 Non-controlling interest 3,350

The Bend Group asset aggregation £ 350 55,950 (parent company only) (parent company) £

Inter-company balances Preferred shares held by parent Bonds held by parent Inter-company trading and loan balances Inter-company dividends payable/receivable.

Preferred shares held by parent Preferred shares acquired on the acquisition Represented by net assets at date of acquisition Dealt with through goodwill Preferred shares not acquired Part of non-controlling interests

Bonds held by parent Bonds acquired on the acquisition Represented by net assets at date of acquisition Dealt with through goodwill Appear in balance sheet as long-term loan (Liability).

Inter-company trading and loan balances Reconcile balance in parent with subsidiary Should be the same Timing differences such as cash in transit Update to make balances equal Eliminate the inter-company balances Subsidiary as debtor in parent balance sheet; parent as creditor in subsidiary balance sheet.

Example: Prose Group – pp.610-614 (pp.425-428) 1 January 20X1 Prose acquired in Verse 80% of the 10,000 £1 common shares for £21,100 20% of preferred shares for £2,000 10% of the bonds for £900 Retained earnings were £4,000 Fair value of non-current assets was £1,000 > BV.

Example – the Prose Group (Continued) During 20X1 Prose sold inventory to Verse for £3,000 This was at cost plus 25% Half was still in inventory at 31 December Group accounting policies Increase non-current assets by 100% of excess.

The Prose Group – asset section

The Prose Group – equity and liability section

The Prose Group – goodwill calculation

The Prose Group – inter-company adjustments

The Prose Group – non-controlling interest

The Prose Group – aggregate assets

The Prose Group – equity section

Uniform accounting policies Parent and subsidiary to use uniform policies Accounts with year ends within 3 months of each other Subject to adjustment for significant transactions.

Review questions The 2006 accounts of Eybl International state: Elimination of intra-group balances Advances . . . arising in the course of business between the companies included in the consolidation . . . are eliminated. (a) Discuss three examples of inter-company (also referred to as intra-group) accounts (b) Explain what is meant by ‘have been eliminated’ (c) Explain what effect there could be on the reported group profit if inter-company transactions were not eliminated.

Review questions (Continued) Explain why the non-controlling interest is calculated as at the year-end whilst goodwill is calculated at the date of acquisition. Explain why pre-acquisition profits of a subsidiary are treated differently from post-acquisition profits. Explain the effect of a provision for unrealised profit on a non-controlling interest: (a) where the sale was made by the parent to the subsidiary and (b) where the sale was made by the subsidiary to the parent.