1 / 24

Financial Statements 2

Financial Statements 2. Consolidations 1 – Introduction and consolidated statement of financial position. What is a group?. Parent company Subsidiary companies. Parent. Subsidiary. Subsidiary. What is a subsidiary?. A company controlled by another company Control may be because:

huslu
Download Presentation

Financial Statements 2

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Financial Statements 2 Consolidations 1 – Introduction and consolidated statement of financial position

  2. What is a group? • Parent company • Subsidiary companies Parent Subsidiary Subsidiary

  3. What is a subsidiary? • A company controlled by another company • Control may be because: • The parent owns the majority of the voting rights (usually by owning more than half the ordinary shares) • The parent can appoint a majority of the directors • The parent can exercise dominant interest

  4. What are consolidated accounts? • Present the results of the group as if it were one single entity (substance over form) • All the transactions of a subsidiary are under the control of the parent • All results are the responsibility of the parent • The shareholders of the parent company need to be fully informed about all the actions of the directors, including their management of subsidiaries

  5. The acquisition method • Add together similar items in the parent and subsidiary accounts • Cancel inter-company transactions and balances • Allow for any non-controlling interest • Account for goodwill

  6. Top part of the statement of financial position • This is the operational assets and liabilities of the group. These are always under the full control of the group so 100% of parent and subsidiary are added • Any inter-company balances are cancelled out • Goodwill on acquisition is included as an intangible non-current asset

  7. Bottom part of the SFP • This represents ownership • Share capital is always just the parent company • Each reserve is: • 100% of parent company • Share of subsidiary’s post-acquisition reserve

  8. Example 1 – a simple consolidation • H has bought 100% of S • The investment of H and the share capital of S need to be cancelled out. • All other assets and liabilities are added together • Share capital is only H • S has been owned since incorporation so all retained earnings are post-acquisition and are included • Retained earnings are therefore

  9. Example 1 – consolidated statement of financial position of H Ltd £000 £000 Non Current Assets Equity Freehold land Ordinary shares Plant Retained Profits 450 Current Assets Inventory Receivables Cash Current Liabilities Trade creditors Corporation tax Non current liabilities 10% debentures 450

  10. Example 2 – cancellation of internal items • H has bought 100% of S share capital and some debentures • Investment 1 of H and the share capital of S need to be cancelled out. • Investment 2 and the debentures of S need to be cancelled. NB H owns 60,000, not all of them. • Dividend receivable by H needs to be cancelled with the dividend payable of S • Inter-company balances must always be cancelled

  11. Example 2 – consolidated statement of financial position of H Ltd £000 £000 Non current assets Equity PPE 380 Ordinary shares Retained Profit Current Assets 580 Other 390 Current liabilities Dividends payable Other creditors (140) Non current liabilities £1 8% debentures 580

  12. Example 3 – non-controlling interest • Less than 100% of S is owned by H – S owns 80,000 out of 100,000 shares so owns 80%. The non-controlling shareholders own 20% • H still controls 100% of the assets and liabilities of S • Top part of SFP reflects control – add 100% of S to H

  13. Example 3 – non-controlling interest • Bottom part of SFP reflects ownership • SC is H only • Retained earnings is H plus share of post-acquisition earnings of S: • Non-controlling interest shows the amount owned by the non-controlling shareholders: shareholders’ funds of S times the non-controlling share:

  14. Example 3 – consolidated statement of financial position of H Ltd £000 Non current Assets PPE 180 Current assets 160 Current liabilities (70) 270 Equity Ordinary shares Retained Profit Non-controlling interest 270

  15. Example 4 • As example 3 plus • Cancel inter-company balance: Dividend payable by S x H share The remaining dividend is due to the NCI so remains as a liability

  16. Example 4 – consolidated statement of financial position of H Ltd £000 Non current Assets PPE 180 Current Assets Other current assets 152 Current liabilities Sundry (60) Dividends payable 270 Equity Ordinary shares of £1 Retained Profit Non-controlling interest 270

  17. Example 5 – Preference share capital with non-controlling interest • Calculate percentage interest in ordinary shares and preference shares • Voting rights attach only to ordinary shares • Retained earnings all belong to the ordinary shareholders • Preference shareholders are only interested in the preference share capital • NCI is in both the preference and ordinary shares

  18. Example 5 – Workings • W1 percentage shareholdings: • Ordinary shares 30,000/40,000 = • NCI in ordinary shares = • Preference shares 18,000/20,000 = • NCI in preference shares = • W2 Non-controlling interest • Prefs • Ords • W3 Retained earnings • H • S

  19. Example 5 – consolidated statement of financial position of H Ltd £000 Non-current Assets PPE 110 Current Assets 130 Current Liabilities (60) 180 Equity Ordinary shares of £1 Retained Profit Non-controlling interest 180

  20. Example 6 • Calculate percentage interests in prefs and ord shares • Cancel inter-company dividends • Calculate non-controlling interests • Calculate retained earnings

  21. Example 6 – workings • W1 percentage shareholdings: • Ordinary shares 70,000/100,000 = • NCI in ordinary shares = • Preference shares 36,000/60,000 = • NCI in preference shares = • W2 Non-controlling interest • Prefs • Ords

  22. Example 6 – workings • W3 Inter-company dividend • Pref • Ord • Retained earnings • H • S

  23. Example 6 – consolidated statement of financial position of H Ltd £000 Non current Assets PPE 370 Current Assets Other 200 Current Liabilities Dividend payable -ordinary -preference Other (110) 410 Equity Ordinary shares 250 Retained Profit Non-controlling interest 410

  24. Summary • Calculate percentage shareholdings • Calculate NCI as % x net assets of S • Calculate retained earnings as H plus % share of post-acquisition earnings of S • Add together parent and subsidiary • Cancel inter-company balances such as debentures, dividends • Consolidated SC is always only H

More Related