Ac506 lecture 7
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AC506 lecture 7. Pre-acquisition reserves Consolidated profit and loss account. Pre- and post-acquisition reserves.

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AC506 lecture 7

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Ac506 lecture 7

AC506 lecture 7

  • Pre-acquisition reserves

  • Consolidated profit and loss account

Pre and post acquisition reserves

Pre- and post-acquisition reserves

  • When a parent acquires a subsidiary during the financial period or at a date subsequent to the date of incorporation of the subsidiary (when the subsidiary has accumulated reserves), for consolidation purposes it is necessary to distinguish between pre-acquisition and post-acquisition reserves



  • P Ltd purchased 80% of the equity share capital of S Ltd at a cost of €9,600 on 1 January 2000. At that date, the revenue reserves of S Ltd amounted to €2,000

  • Prepare the consolidated balance sheet as at 31 December 2000

Consolidated profit and loss

Consolidated Profit and Loss

  • Previously dealt with profit and loss implications of associates and JVs

  • Consolidation of profit and loss account of parent and subsidiaries follow same logic as balance sheet - parent plus group share of subsidiaries. Eliminate intra-group items.

Standard p l adjustments

Standard P&L adjustments

  • Intra-group turnover

  • Intra-group stock

  • Intra-group charges

  • Minority interest

  • Dividend shuffle and holding company dividend

  • Retained profit brought forward



  • Apple Limited acquired the following in 1987:

    • 90,000 of 100,000 issued €1 ordinary shares in Pear Limited

    • 180,000 of 200,000 issued €1 ordinary shares in Plum Limited

    • 20,000 of 100,000 issued 1% €1 preference shares in Plum Limited

  • Apple controls all the operating and policy decisions in both Pear and Plum

  • The reserves balances of Pear Limited and Plum Limited at the date of acquisition were €1,600 dr and €5,800 cr respectively

  • Prepare consolidated profit and loss account for the Apple Group

Intra group turnover

Intra-group turnover

  • During the financial year, Apple sold goods to Plum for €48,000.

    => Intragroup sales and purchases amounts to be eliminated

  • Of these, Plum holds stock costing Plum €2,700 at year-end.

  • Unrealised profit to be eliminated from cost of sales and stock asset

  • Apple makes a 20% gross profit based on cost on all intra group sales.

    => Amount to be eliminated = 2,700/6 = €450

Intra group charges

Intra-group charges

  • Included in Pear’s administrative expenses is a holding company management charge of €2,000. This has been recognised in the books of Apple as management fee income.

  • Eliminate all management charges, interest on loans, debenture interest charged by one group company to another.

Minority interest

Minority interest

  • Although Apple has control over the activities of the companies in the group, it does not have legal title to 100% of the shares and consequently to 100% of the profits.

  • We must calculate and show the amount attributable to the minority interest

    =>Minority interest of Pear is 10% of the ordinary shares; and

    =>Minority interest of Plum is 10% of the ordinary shares and 80% of the preference shares

Intragroup dividends

Intragroup dividends

  • Once minority interest has been deducted from total profit, all amounts in the consolidated profit and loss account are group share only => net of minority interest

  • Apple has included dividend income in its sundry income

  • Eliminate from Apple income and corresponding dividend payments in Pear and Plum. Note there is no change to the profit retained by the group as a result of the intragroup elimination

Reserves brought forward

Reserves brought forward

  • Pear€1,600 dr

  • Plum€5,800 cr

  • Exclude pre-acquisition reserves (Adjust 1)

  • Include group share of post-acquisition reserves only (Adjust 2)

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