CHAPTER 28 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

28.1 INTRODUCTION Common Adjustments Intragroup sales Intragroup inventory Intragroup charges Non-controlling interests Dividends Retained profit brought forward Other Adjustments Revaluation of assets Acquisition of a subsidiary during the accounting period Unrealised profit in opening inventory Pre-acquisition reserves Intragroup transfer of tangible non-current assets

28.2 COMMON CONSOLIDATION ADJUSTMENTS

Intragroup sales Consolidated financial statements report transactions and balances with parties outside the group Intragroup sales (and cost of sales) should be eliminated from the consolidated financial statements As one company’s sales are another company’s cost of sales, both amounts should be excluded

Example 28.1: Intragroup sales A parent company has a 70% interest in a subsidiary. Items in the SPLOCI of each company included the following:   Parent Subsidiary € Revenue 800,000 600,000 Cost of Sales 480,000 350,000 These figures include sales from the subsidiary to the parent company of €100,000. Requirement How much should be included in the consolidated SPLOCI in respect of the following: Revenue; and Cost of Sales. Solution The sales from the subsidiary to the parent company are only internal to the group and as such should not be included in revenue in the consolidated SPLOCI. Consequently, the sales have been recorded as purchases by the parent and these too need to be eliminated. Revenue (€800,000 + €600,000 − €100,000) = €1,300,000 Cost of Sales (€480,000 + €350,000 − €100,000) = €730,000

Intragroup inventory Where intragroup inventory (i.e. inventory on hand at the reporting date which has been purchased from another group company) is held by a group company at the reporting date, any profit element must be excluded It is necessary to adjust the books of the company which made the unrealised inventory profits (i.e. the selling company) Care must be taken to identify which company made the sale If the parent company made the sale, then all of the unrealised profit is charged to the parent’s books If the subsidiary made the sale, then the unrealised profit is charged between the parent and the subsidiary in their ownership ratio

Example 28.2: Parent to subsidiary In October 2012, Parent Limited sold goods to Subsidiary Limited with an invoice value of €400,000 on which Parent Limited made a mark up of 25%. One half of these goods remained in Subsidiary Limited’s inventory at 31 December 2012. There was no other trading between the two companies during 2012. Requirement: Prepare the adjustments required. Solution   Intracompany transactions €’000 €000 (a) Sales DR Revenue 400 CR Cost of sales (b) Inventory profit DR Cost of sales 40 CR Inventory - being inventory profit €/£400,000 x 50% x 25/125

Example 28.3: Subsidiary to parent Company A is the parent company of company B, owning 80%. The year end is 31 December 2012 and consolidated accounts are to be prepared. The following information is available:   Company A Company B € Revenue 100,000 80,000 Cost of Sales 60,000 30,000 Inventory on hand 31 December 2012 50,000 Company B sold to Company A €20,000 of goods during 2012, at a profit of 10%. At 31 December 2012, Company A had remaining in inventory €8,000 of these goods. Requirement: Prepare the adjustments required.

Example 28.3: Subsidiary to parent Solution Company B is selling to A at a profit; however this profit is only realised to the group once company A sells the inventory externally. As such, any profit element which is still in inventory needs to be eliminated. Adjustments: Exclude €20,000 from company B’s revenue and company A’s purchases, being intragroup sales (Dr Sales €20,000 and Cr Cost of sales €20,000). Inventory on hand at 31 December 2012 includes €8,000 which was the cost from company B to company A. However the cost to the group was €8,000 x 100/110 = €7,273. Therefore the profit on the inventory is €727. This is to be eliminated from the group inventory, with consolidated cost of sales being increased by €727 (Dr Cost of Sales €727, Dr Inventory €727). As the sale is from the subsidiary to the parent, the NCI is charged with their share of the inventory profit (i.e. €727 x 20% = €145.40). Therefore group inventory in the consolidated statement of financial position at 31 December 2012 will be stated at €79,273 (i.e. €50,000 + €30,000 - €727).

Intragroup charges As all intragroup transactions, together with any resulting profit should be eliminated, it is necessary to ensure that intragroup management charges, interest on loans, debenture interest and dividends are all cancelled out of group expenses and group income See Chapter 28, Example 28.5

Non-controlling interests See also Chapter 27, Section 27.5 After ‘profit after taxation’, it is necessary to calculate the portion of profit of subsidiaries which relates to NCI The NCI in the profit of subsidiary companies is based on the profits after tax of the subsidiaries, after any adjustments required in the question that impact on subsidiary profits (e.g. unrealised profit on intragroup inventory (See Example 28.3)

Ordinary dividends Remember, all intragroup transactions and balances should be eliminated on consolidation Ordinary dividends are an appropriation of profit and therefore should be taken through reserves Furthermore, proposed ordinary dividends cannot be accrued until approved by shareholders at the AGM (See Chapter 15 – IAS 10 Events after the Reporting Period). Dividends declared after the reporting date should only be recognised as liabilities at the reporting date if there is a legal obligation to receive them Consequently, proposed ordinary dividends may need to be reversed With respect to ordinary dividends paid by the subsidiary, most is paid to the parent and is therefore cancelled or eliminated on consolidation The remainder of the subsidiary’s dividend is paid to the NCI and is included in the NCI calculation

Retained earnings brought forward The definition of this is: the retained earnings of the parent at the start of the period; plus the group’s share of the post-acquisition earnings of the subsidiary to the start of the period.

Example 28.4: Retained earnings Company A acquired 80% of the ordinary shares of Company B on 1 January 2011 when the retained profits of that company were €100,000 credit. At 1 January 2012, the retained profits of the companies were: A Limited €800,000 B Limited €250,000 Requirement What are the retained profits brought forward in the consolidated SPLOCI for the year ended 31 December 2012? Solution Company A Limited Company B Limited (80% x (€250,000 – €100,000)) €120,000   €920,000

See Chapter 28, Example 28.5

28.3 OTHER ADJUSTMENTS

Revaluation of assets When a holding company purchases the shares of a subsidiary, the net assets of the subsidiary must be included in the consolidated statement of financial position at their FV at the date of acquisition This revaluation to FV is a consolidation adjustment only (i.e. the subsidiary may not record the necessary revaluation journal itself) If the revaluation is accounted for in the books of the subsidiary, then no further consolidation adjustment is required If no entries have been posted to the subsidiary’s books (as is usually the case in questions), the revaluations will need to be incorporated into the consolidated financial statements This may have an effect on the consolidated SPLOCI (e.g. in respect of non-current assets, the depreciation charge in the subsidiary’s accounts will be based on the carrying value in the subsidiary’s books. Since these non-current assets will require a revaluation adjustment, a revised depreciation charge (either upwards or downwards) will have to be computed based on the re-valued amount

Acquisition of a subsidiary during the accounting period The pre-acquisition profits of a subsidiary must be excluded from the consolidated SPLOCI Only items after the date of acquisition should be included in the consolidated SPLOCI The calculation of the pre-and post-acquisition elements is generally on:  a time-apportioned basis (e.g. revenue); an actual basis (e.g. exceptional items); or a combination of the two. Unless stated otherwise, a time-apportioned basis will be appropriate Remember, the SFP figures should be not time apportioned as this is the position at the end of the accounting period See Chapter 28, Example 28.6

Unrealised profit in opening inventory An adjustment may be required to reduce opening inventory where, at the beginning of the year, one company’s inventory included goods purchased from another group company In this case, the adjustment required will reduce opening inventory in cost of sales and will reduce opening reserves carried forward, by the unrealised profit element Remember the adjustment should be made in the appropriate company’s column (i.e. the company carrying the profit). See Chapter 28, Example 28.7

Pre-acquisition reserves Any reserves that a subsidiary has prior to the acquisition by the parent are not part of the group reserves and thus must be excluded from the reserves of the group in the consolidated accounts Effectively, this means that the pre-acquisition reserves of a subsidiary are ‘frozen’ However, IAS 27 allows an entity to recognise a dividend paid from pre-acquisition profits from a subsidiary in its separate FS (See Chapter 27, Section 27.7)

Intragroup transfer of tangible non-current assets (PPE) An adjustment is required to cancel any unrealised profit on such assets held at the year-end: DR SPLOCI – P/L – profit on sale of non-current assets CR SFP – non-current assets An additional problem arises with tangible non-current assets in that depreciation charges to the SPLOCI – P/L would be based on the ‘incorrect’ inflated non-current asset value. Consequently, an additional journal is required to reduce the depreciation charge to its correct amount so that it is based on original cost to the group: DR SFP – accumulation depreciation CR SPLOCI – depreciation charge Other issues to consider are In which period did the transfer occur? Which company (P or S) made the ‘sale’?

Table 28.1: Pro forma consolidated SPLOCI Item Computation Revenue P + S minus IG Cost of sales P + S minus IG + unrealised inventory profit All expenses P + S ± any adjustments in question such as extra or over depreciation Investment income Only dividends received from outside the group Income tax expenses P + S Non-controlling interest S profit after taxation as adjusted. Transfers to reserve P + group’s share of S Retained profit brought forward P + group’s share of S post acquisition profits Note Remember ordinary dividends are an appropriation of profits and should be taken through reserves.