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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:

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financial statements 2

Financial Statements 2

Consolidations 1 – Introduction and consolidated statement of financial position

what is a group
What is a group?
  • Parent company
  • Subsidiary companies

Parent

Subsidiary

Subsidiary

what is a subsidiary
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
what are consolidated accounts
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
the acquisition method
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
top part of the statement of financial position
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
bottom part of the sfp
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
example 1 a simple consolidation
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
example 1 consolidated statement of financial position of h ltd
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

example 2 cancellation of internal items
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
example 2 consolidated statement of financial position of h ltd
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

example 3 non controlling interest
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
example 3 non controlling interest1
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:
example 3 consolidated statement of financial position of h ltd
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

example 4
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

example 4 consolidated statement of financial position of h ltd
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

example 5 preference share capital with non controlling interest
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
example 5 workings
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
example 5 consolidated statement of financial position of h ltd
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

example 6
Example 6
  • Calculate percentage interests in prefs and ord shares
  • Cancel inter-company dividends
  • Calculate non-controlling interests
  • Calculate retained earnings
example 6 workings
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
example 6 workings1
Example 6 – workings
  • W3 Inter-company dividend
    • Pref
    • Ord
  • Retained earnings
    • H
    • S
example 6 consolidated statement of financial position of h ltd
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

summary
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