Presentation on theme: "Chapter 24 Preparation of Consolidated Statements of Comprehensive Income, Changes in Equity and Cash Flows."— Presentation transcript:
1 Chapter 24Preparation of Consolidated Statements of Comprehensive Income, Changes in Equity and Cash Flows
2 Objectives By the end of this chapter, you should be able to: prepare a consolidated statement of comprehensive income;eliminate inter-company transactions from a consolidated statement of comprehensive income;attribute comprehensive income to the non- controlling shareholders;prepare a consolidated statement of changes in equity;prepare a consolidated statement of cash flows.
3 Consolidated income statements Treatment in consolidated income statement of:Unrealised profit on inter-company inventoriesPre-acquisition profitsDividends or interest paid out of pre-acquisition profitsAdjustment required when a subsidiary is acquired part of the way through the year.
4 Example: Ante Group – pp.620-623 (pp.431-434) At the date of acquisition on 1 January 20X2Ante acquired75% of the common shares and20% of the preferred shares in Post plcThe retained earnings of Post were £30,000Ante paid £10,000 more than the fair value of the net assets acquired.
5 Example – Ante Group (Continued) During the year ended 31 December 20X2Ante had sold Post goods at their cost price of £9,000 plus a mark up of a thirdAt the end of the financial year on 31 December 20X2Half of these goods were still in the inventory at the end of the year20% is to be written off goodwill as an impairment loss.
6 Example – Ante Group (Continued) Statement of comprehensive income for the year ended 31 December 20X2Ante £ Post £ Consolidated £Sales , , , Notes 1/3Cost of sales , , , Notes 1/2/3Gross profit , , ,500Expenses , , , Note 4Impairment of goodwill , Note 5Profit from operations80, , ,418
7 Ante example – Note 11. Eliminate inter-company sales on consolidationCancel the inter-company sales of 12,000 (9, /3) by(i) Reducing the sales of Ante from 200,000 to 188,000 and(ii) Reducing the cost of sales of Post by the same amount from 60,000 to 48,000
8 Ante example – Note 22. Eliminate unrealised profit on inter-company goods that were still in inventory(i) Ante had sold the goods to Post at a mark up 3,000(ii) Half the goods remain in the inventories of Post at the year-end(iii) From the Group’s view there is an unrealised profit of half of the mark up, that is 1,500. Therefore:– Deduct 1,500 from the gross profit of Ante by adding this amount to the cost of sales– Add this amount to a provision for unrealised profit– Reduce the inventories in the consolidated statement of financial position by the amount of the provision (as explained in the previous chapter).
10 Ante example – Note 6 6. Accounting for the inter-company dividends (i) The common dividend 3,750 received by Ante is 75% of the 5,000 dividend payable by Post(ii) Cancel the inter-company dividend receivable by Ante with 3,750 dividend payable by Post, leaving the 1,250 dividend payable by Post to the non-controlling interest (the 1,250 will be included in the consolidated statement financial position non-controlling interest figure)(iii) The preferred dividend of 600 received by Ante is 20% of the 3,000 payable by Post(iv) Cancel 600 preferred dividend receivable by Ante with 600 of the preferred dividend payable by Post(v) The balance of 2,400 remaining is payable to the non-controlling interest and 2,400 will be included in the consolidated statement of financial position non-controlling interest figure.
15 Ante SOCE (Continued)Note 2: Opening balance for non-controlling shareholders54,000 x 25% = 13,500. The relevant percentage to use is 25% because only ordinary shareholders will have any interest in retained profits.Note 3: Dividends paidIn the Ante Group column the dividends paid are those of the parent only. The parent share of Post dividends is cancelled by Ante’s investment income. Non-controlling share is dealt with in their column. Non-controlling shareholders dividends are 25% of 5, % of 3,000
16 Adjustment where non-current asset is acquired from a subsidiary Digdeep plc is a civil engineering company that has a subsidairy, Heavylift plc that manufactures digging equipmentAssume that at the beginning of the financial year Heavylift sold equipment costing £80,000 to Digdeep for £100,000It is Digdeep’s depreciation policy to depreciate at 5% using the straight line method.
17 Revenue adjustmentOn consolidation, the following adjustments are required:Revenue is reduced by £20,000 and the asset is reduced by £20,000 to bring the asset back to its cost of £80,000Revenue is then reduced by £80,000 and cost of sales reduced by £80,000 to eliminate the intra-group saleDepreciation needs to be based on the cost of £80,000 by crediting depreciation and debiting the accumulated depreciation. The depreciation charge was £5,000 (5% of £100,000), it should be £4,000 (5% of £80,000) so the adjustment is:DR: Accumulated depreciation £1,000CR: Depreciation in the statement of income £1,000
18 Subsidiary acquired part way through year Restrict profits recognised in consolidated accountsOnly include post acquisition profit.
19 Tight example – pp.625-627 (pp.435-437) At the date of acquisition on 30 September 20X1Tight acquired75% of the common shares and20% of the 5% bonds in LooseThe retained earnings of Loose were £69,336Tight paid £10,000 more than the book value of the net assets acquiredThe book value and fair value were the same.
20 Tight example (Continued) During the yearAll income and expenses accrued evenlyDividend receivable may be apportioned on a time basisOn 30 June 20X0 Tight sold Loose goods for £4,000 plus a mark-up of one-third.
21 Tight example (Continued) At the end of the financial yearTight prepares consolidated accounts at 31 DecemberHalf of intra-group goods were still in stock.
25 Tight – Note 4 4. Accounting for inter-company interest The interest receivable by Tight is apportioned on a time basis, 9/12 2,000 1,500 is treated as being pre-acquisition and deducted from the cost of the investment in Loose.The remainder (£500) is cancelled with £500 of the post-acquisition elements of the interest payable by Loose. The interest payable figure in the consolidated financial statements will be the post-acquisition interest less the inter-company elimination which represents the amount payable to the holders of 80% of the bonds.Total interest payable 10,000 pre-acquisition 7,500 inter-company 500 £2,000
26 Tight – Notes 5 and 6 £ 5. Accounting for inter-company dividends Amount receivable by Tight = 3,600The dividend receivable by Tight is apportioned on a time basis, thepre-acquisition element is credited to the cost of the investment in Tight’sbalance sheet, that is 9/12 3,600 = (2,700)The post-acquisition element is cancelled with part of the dividend payablein Loose’s income statement prior to consolidation = (900)Amount credited to consolidated income statement NIL6. Aggregate the tax figuresThis includes the whole of the parent’s tax and the time apportionedsubsidiary’s tax, that is 14,004 + (6,000 3/12) = £15,504The group taxation is that of Tight plus 3/12 of Loose
31 Review questionsExplain why the dividends deducted from the group in the statement of changes in equity are only those of the parent company.Explain how unrealised profits arise from transactions between companies in a group and why it is important to remove them.Explain why it is necessary to apportion a subsidiary’s profit or loss if acquired partway through a financial year.Explain why dividends paid by a subsidiary to a parent company are eliminated on consolidation.
32 Review questions (Continued) Give five examples of intercompany income and expense transactions that will need to be eliminated on consolidation and explain why each is necessary.A shareholder was concerned that following an acquisition the profit from operations of the parent and subsidiary were less than the aggregate of the individual profit from operations figures. She was concerned that the acquisition, which the directors had supported as improving earnings per share, appeared to have reduced the combined profits. She wanted to know where the profits had gone. Give an explanation to the shareholder.