Consolidated Statements After Acquisition: 2238 Financial Reporting - 2021/2022 T1

2238 Financial Reporting | 2021/2022 T1
Consolidated statements
after acquisition
1
CONSOLIDATED STATEMENTS AFTER ACQUISITION
Statement of financial position
2
Consolidated Statement of Financial

Position after Acquisition
Post-acquisition profit and

losses of subsidiary have arisen
Pre-acquisition profit and losses
under the control of the parent and
of subsidiary are represented by
so are included in the group
retained earnings of subsidiary and
consolidated statement,
are taken into account when
showing up in the retained
estimating goodwill.
earnings figure in the statement of
financial position.
3
Statement of Financial Position //

Illustration
On 1/1/20X1 Bend plc acquired 80% of the 10,000 £1 common shares in Stretch plc
Investment in Stretch cost £12,000.
Stretch plc Retained earnings were £4,000.
Fair value of the non-controlling interest at the date of acquisition was £2,950 and
Method 2 was employed.
Fair value of non-current assets was £600 above book value.
Prepare consolidated statements of financial position on 31/12/20X1
4

Illustration
5

Illustration
6

Illustration
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Intercompany transactions
A B
All intercompany transactions must be eliminated so that the
Adjust retained earnings and inventories when intercompany
consolidated sales and cost of sales include only transactions
sales include profit loading
with non-group parties
• EXAMPLE: the parent Many plc sells goods to subsidiary Few plc for • EXAMPLE: Many plc has bought £1,000 worth of goods and sold
£1,500. Assume that by the end of the fiscal year, Few plc has sold them to Few plc for £1,500, making a profit of £500 in Many’s own
all goods to a customer. Eliminate intercompany transactions as accounts. If all items are still on Few’s inventory, what are the
follows: relevant additional adjustments to the consolidated financial
statements?
Dr Sales of Many plc 1,500
Cr Cost of sales of Few plc 1,500 Cr Inventory of Few plc 500
Dr Retained earnings of Many plc 500
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Intercompany transactions //
Complete illustration
On 1/1/20X1 Prose acquired in Verse
• 80% of the common shares for £21,100
• 10% of the 5% bonds for £900
Retained earnings as at 1/1/20X1 were £4,000.
Fair value of non-current assets in Verse was £1,000 above book value.
Method 1 was used for non-controlling interests.
During the year, Prose sold inventory to Verse for £3,000 which represented cost plus
25% markup. Half of the goods are still in inventory at 31/12/20X1.
Prepare the consolidated statement of Financial Position.
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10
11
CONSOLIDATED STATEMENTS AFTER ACQUISITION
Income statement
12
Consolidated Income Statement

1 2 3
Eliminating any
Adding any
Eliminating inter-company intragroup dividends
unrealized profit to
sales or interest received or
the cost of sales figure
receivable
13
Consolidated Income Statement //

Ilustration
At the date of acquisition of 1/1/20X3: At the end of the financial year 31/12/20X4, half of
these goods were still in the inventory.
• Ante acquired 75% of ordinary shares in Post
• Retained earnings of Post were £30,000 Dividends payable in 20X4 on ordinary shares of Ante
were £40,000 and on ordinary shares of Post £5,000
At the end of 20X3, retained earnings of Ante were
£69,336 and retained earnings of Post were £54,000 Prepare consolidated statement of income
During the year ended 31/12/20X4, Ante sold Post

goods at their cost price of £9,000 plus a markup of
1/3. These were the only intercompany sales.
14
Consolidated Income Statement //

Ilustration
15
Depreciation of revalued assets at

aquisition
EXAMPLE
Annual charge in subsidiary’s income statement:
The parent acquired non-current assets from • £100,000/5 = 20,000
subsidiary which had a book value of £100,000,
that was being depreciated by the subsidiary on Appropriate charge in the consolidated statements:
a straight-line basis over the next 5-years
(residual value is zero) • £150,000/5 = 30,000
If the fair value on acquisition was £150,000, Adjustments:

what adjustments need to be made to the • Dr depreciation expense £10,000
consolidated statements? • Cr Accumulated depreciation £10,000
16
Depreciation with profit loading

EXAMPLE Decrease asset to 80,000, reverse intercompany sale and unrealized
gain:
Heavylift, subsidiary of Digdeep, sells to

Dr Revenue 100,000
Digdeep equipment that costs $80,000 for
$100,000. Cr Cost of sales 100,000
Dr RE (through cost of sales) 20,000
It is Digdeep ‘s depreciation policy to Cr Asset 20,000
depreciate equipment at 5% with nil scrap
value. Additionally depreciation should be based on historical cost of 80,000:
What are the required adjustments to Dr Accumulated depreciation 1,000 = (100,000-80,000) * 5%

consolidated statement of income? Cr Depreciation expense (P&L) 1,000
17
Dividends paid out of pre-acquisition

profits
EXAMPLE
Bow acquired 75% of shares in Tie on The dividend received from Tie is not
1/1/20X4 for £80,000 when the balance of income to Bow and must not appear
retained earnings of Tie was £40,000. in Bow’s financial statements
On 1/1/20X4 Bow received a dividend of The correct treatment is to deduct it

£3,000 from Tie out of the profits for the from the investment in Tie which will
year ended 31/12/20X3 then become £77,000 (£80,000-3,000)
with a debit to dividends received and
How should this dividend be treated? a credit to Investment in Tie
18
Mid-year transaction
EXAMPLE
Tight acquired Loose on 30/9/20X1

How should statement of income be consolidated?
Apply a time proportional factor: 3/12
• Revenues = 200,000 + 120,000*3/12 = 230,000

• COGS = 60,000 + 60,000*3/12 = 75,000
• Expenses = 59,082 + 30,000*3/12 = 66,582
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2238 Financial Reporting | 2021/2022 T1

Statement of financial position

Consolidated Statement of Financial

Post-acquisition profit and

Statement of Financial Position //

Stretch plc Retained earnings were £4,000.

Fair value of non-current assets was £600 above book value.

Prepare consolidated statements of financial position on 31/12/20X1

Statement of Financial Position //

Statement of Financial Position //

Statement of Financial Position //

Retained earnings as at 1/1/20X1 were £4,000.

Method 1 was used for non-controlling interests.

Prepare the consolidated statement of Financial Position.

CONSOLIDATED STATEMENTS AFTER ACQUISITION

Consolidated Income Statement

Consolidated Income Statement //

During the year ended 31/12/20X4, Ante sold Post

Consolidated Income Statement //

Depreciation of revalued assets at

If the fair value on acquisition was £150,000, Adjustments:

Depreciation with profit loading

Heavylift, subsidiary of Digdeep, sells to

What are the required adjustments to Dr Accumulated depreciation 1,000 = (100,000-80,000) * 5%

Dividends paid out of pre-acquisition

On 1/1/20X4 Bow received a dividend of The correct treatment is to deduct it

Tight acquired Loose on 30/9/20X1

Apply a time proportional factor: 3/12

• Revenues = 200,000 + 120,000*3/12 = 230,000

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