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1. Introduction
The 20th century saw a sea of change in the corporate structure. Corporations have grown globally. Expansion and increase of wealth through acquisition of subsidiary, foreign collaboration has become common. A fact of modern society is the conglomerate which is involved in many industries usually series of interlocking of companies. Another name for conglomerate is Group companies which is holding company and its subsidiaries.
2. Acquisition
An acquisition occurs when an entity acquires the control of another entity. The investor which controls another entity is known as the holding company while the company invested in is known as the subsidiary. A holding company together with subsidiary will form a group. The definition of
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control is that the holding company is able to exercise the majority of the voting rights at the Annual General Meeting (AGM) whereby it will be able to elect the majority of the members of the board of directors. These directors determine the financial and operating policies of the company. The usual way to acquire control of another company is by acquiring more than one half of the voting power in the investee company. A subsidiary company is defined as a company in which the majority of the shares are owned by another corporation; another corporation controls the composition of the board; or has the power to cast more than half of the votes. In determining a holding company, the accounting standard IAS 27 stresses that control rather than ownership is the key. The corporation exerting the control is a holding company.
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two current accounts sometimes may not show equal amounts. This is often due to two items, namely goods in transit and cash in transit. Note that transit means on the way. Bills of exchange. Intra group bills of exchange which are disclosed in the individual balance sheets of H LTD and S LTD must be eliminated and not shown in the consolidated balance sheet since they represent inter-company indebtedness. However, bills of exchange relating to outsiders and intra group bills that have been discounted must be shown in the consolidated balance sheet. Dividends paid by a subsidiary undertaking to its parent undertaking will be shown as paid dividends in the final accounts of the subsidiary, and as dividends received in the final accounts of the parent undertaking.
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journals, ledgers and worksheets involves considerable amount of paper work and duplication of time, energy and money. Hence, there is a proposal for a simpler and effective approach to this most complicated consolidation.
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Henry $ ASSETS Investment in 240,000 Ordinary shares of Scooby at cost Fixed assets Stock-in-trade Debtors Bills receivable Loan to Scooby Bank LIABILITIES Ordinary shares of $1/- each Profit and loss account Creditors Bills payable Loan from Henry 300,000 1,500,000 150,000 90,000 60,000 90,000 60,000 2,250,000 1,800,00 360,000 60,000 30,000 2,250,000
Scooby $
600,000 60,000 15,000 30,000 6,000 711,000 300,000 165,000 90,000 75,000 81,0000 711,000
Required The consolidated balance sheet of the group as at 31-12 -1998. Workings under Traditional Method using Journals and Ledgers:
Henry 80% Minority Shareholders 20%
Cancellation of inter-company balances: Debtors of Henry of $30,000 are cancelled against creditors of Scooby. Bills receivable of Henry to the amount of $21,000(i.e. the bills drawn by Henry and accepted by Scooby of $45,000 less bills discounted of $24,000) to be cancelled against bills receivable of Scooby. A note to denote the bills discounted of $24,000 to be appended to the consolidated balance sheet. Loan to Scooby to be adjusted for remittance in transit of $9,000. The amount owing of $81,000 to be cancelled against loan from Henry.
A New Approach to the Preparation of Consolidated Financial Statements of Group Companies Journal Entries
Debit 240,000 36,000 24,000 60,000 33,000 93,000 6,000 6,000 30,000 30,000 21,000 21,000 81,000 9,000 90,000 Credit
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a)
b)
c) d) e) f)
Ordinary Shares in Scooby (80%) P & L Account in Scooby (80% of Pre Acq) Goodwill on Consolidation Investment in Scooby Ordinary Shares in Scooby (20%) P & L Account in Scooby (20%) Minority Interest Consolidate P & L Account Goodwill on Consolidation (impairment) Creditors Scooby Debtors Henry Bills payable Bills receivable Loan from Henry Cash in transit Loan to Scooby
300,000
Ledger Accounts
Investment in Scooby (80%) $ 300,000 Ordinary shares of Scooby Profit and loss of Scooby Goodwill on consolidation 300,000 Goodwill Investment $ 24,000 Consolidated profit and loss account (impairment) To CBS $ 6,000
Balance
24,000 Minority Interest (20%) To CBS $ 93,000 93,000 Consolidated Profit and Loss Account $ 6,000 Balance b/d of Henry 450,000 Profit and loss of Scooby 456,000
Profit and Loss Account of Scooby $ 36,000 Balance b/d 96,000
18,000 24,000
To Investment ($45,000x80%) To consolidated profit and loss account ($165,000 $45,000) x80%) Minority interest ($165,000 x 20%)
$ 165,000
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CBS $000
Assets Investment in 240,000 Ordinary shares of Scooby at cost Fixed assets Stock in trade Debtors Bills receivable Loan to Scooby Bank Goodwill on Consolidation Total Liabilities Ordinary shares Profit and loss account
300 1500 150 90 60 90 60 2250 1800 360 600 60 15 30 6 711 300 165 f9 a24 33 a240 b60 a36 b33 c6 d30 e21 81
Creditors Bills payable Loan from Henry Minority interest Total Grand Total of Debit Credit Adjustments
60 30
90 75
2250
711
507 540
Consolidated Balance sheet of Henry and of its subsidiary Scooby as at 31.12.98 $ $ Goodwill on consolidation 18,000 Fixed assets 2,100,000 2,118,000 Current assets Stock 210,000 Debtors 75,000 Bills receivable 66,000 Cash bank and in transit 75,000 426,000 Less Current liabilities Creditors 120,000 Bills payable 81,000 201,000 225,000 2,343,000 Financed by: Ordinary shares of $1/-each 1,800,000 Consolidated profit and loss account 450,000 2,250,000 Minority shareholders interest 93,000 2,343,000
Notes to the accounts: (1) Henry holds 80% of the issued ordinary share capital of Scooby as from 1.1.98. (2) Henry has a contingent liability of $24,000 on bills discounted.
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is treated as Goodwill on consolidation. There is a remarkable amount of savings in space, time, effort, and concentration. Summary of Steps under Accounting Equation Method Post the balance sheets of both holding and subsidiary in a columnar statement. Restructure the Balance Sheet of the Subsidiary by splitting the Profit and Loss account in to Pre Acquisition P & L Account and Post Acquisition P & L Account. Adjust the Investment Account in holding company against the share capital and pre-acquisition profits and reserves of the subsidiary to the extent of controlling interest. Treat the difference between two amounts as goodwill on consolidation. Create Minority Interest Account by transferring minority portion of share capital, profit and reserves (Both pre and post acquisition profits) Eliminate inter company balances Provide for impairment by reducing both Goodwill and Profit & Loss Eliminate the undiscounted portion of bills of exchange involving inter company transactions Now, the same illustration which involves so many journal, ledger and work sheet entries in five pages is presented simply in one page under Accounting Equation Method. Consolidation Under Accounting Equation Method Figures in 000)
Assets Inves- Fixed Stock Deb- Bills tment Asset In tors Rec Trade Balance Sheet Henry 300 1500 150 90 60 Ltd Balance Sheet Scooby 600 60 15 30 Ltd Adjustment of 80% -300 control in Scooby and creation of Good will Minority Interest @ 20% Eliminate debtors due -30 from Scooby Eliminate loan to Scooby and Create Cash in Transit Impairment of Goodwill at current value at 18 (24-18) Undiscounted Bills of -21 S Total 0 2100 210 75 69 Grand Total Assets Details of Transaction I Liabilities Loan Bank Cash Good Ordinary P&L P&L Bills Loan Credi Minority to S in will Shares Pre Post Pay,e from tors Interest Transit Acq Acq Henry 90 60 1800 360 30 60 6 +24 300 -240 45 -36 120 75 81 90
-60
-9
-24 -30
+93
-90
+9
-81
-6
-6
Consolidated Balance Sheet is prepared in the prescribed format which is as follows. It is evident from this presentation that answer is same for both methods.
Consolidated Balance sheet of Henry and of its subsidiary Scooby as at 31.12.98 $ $ Goodwill on consolidation 18,000 Fixed assets 2,100,000 2,118,000 Current assets Stock 210,000 Debtors 75,000 Bills receivable 66,000 Cash bank and in transit 75,000
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Less Current liabilities Creditors Bills payable
Financed by: Ordinary shares of $1/-each Consolidated profit and loss account Minority shareholders interest Notes to the accounts: (1) Henry holds 80% of the issued ordinary share capital of Scooby as from 1.1.98. (2) Henry has a contingent liability of $24,000 on bills discounted.
Illustration 2 Given below are the balance sheets of Harrison Ltd, Steven Ltd and Robert Ltd. 31. 12. X8 Harrison Ltd has acquired 450,000 ordinary shares of Steven Ltd. On 1.1.x3 when the profit and loss account of Steven Ltd. had a balance of $ 60,000. Subsequently, on 1.1.x4 Steven Ltd. acquired 240,000 ordinary shares of Robert Ltd. and the balance in the profit and loss account of Robert Ltd. on that date was $ 30,000.
Harrison Ltd. $ 1,500,000 300,000 1,800,000 540,000 1,260,000 1,800,000 300,000 540,000 840,000 480,000 480,000 Steven Ltd. $ 600,000 240,000 840,000 Robert Ltd. $ 300,000 180,000 480,000
Ordinary shares of $1/- each Profit and Loss account Investment in subsidiaries at cost Ordinary shares in Steven Ltd. Ordinary shares in Robert Ltd. Sundry assets
Required You are required to prepare the consolidated balance sheet as at 31.12.x8. Answer Multi stage method First Stage - Preparation of consolidated accounts for sub-groups Steven Ltd. and Robert Ltd. Journal Entries (Fig in 000)
Debit 240 24 36 60 60 36 36 Credit
a)
b) c)
Ordinary Shares (80% of Roberts shares) P & L A/C (80% of Pre Acquisition Profits) Goodwill on Consolidation Investment in Robert Ordinary Shares (20% of Robert shares) Minority Interest P & L A/C (20% of Profit) Minority Interest
300
A New Approach to the Preparation of Consolidated Financial Statements of Group Companies Ledger Accounts
Investment in Robert Ltd Balance $ 300,000 Ordinary shares in Robert Ltd. Profit and Loss of Robert Ltd. Goodwill on consolidation $ 240,000 24,000 36,000 300,000
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300,000 Minority Interest To CBS $ 96,000 96,000 Consolidated Profit and Loss Account $ 360,000 Profit and Loss balance of Steven Ltd. Robert Ltd. 360,000 Profit and Loss Account of Robert Ltd. $ 24,000 Balance b/d 36,000 120,000 180,000 Worksheet Steven Robert $000 Liabilities Ordinary shares Profit and loss Minority Interest Total Assets Investment in Robert Sundry assets Goodwill Total Grand Total of Debit Credit Adjustment 840 480 360 600 240 $000 300 180 Ordinary shares. Profit and Loss.
To CBS
$ 180,000
180,000
Adjustments Debit Credit $000 $000 a240 b60 a24 c36 b60 c36 96
96 1056
Consolidated Balance Sheet of Steven Ltd. and of its subsidiary Robert Ltd. as at 31.12.x8 $ $ Sundry assets 1,020,000 Goodwill on Consolidation 36,000 1,056,000 Ordinary shares of $1/-each 600,000 Consolidated profit and loss account 360,000 960,000 Minority shareholders interest 96,000 1,056,000
Second Stage - Preparation of consolidated accounts of Harrison Ltd. and the sub-group Steven Ltd & Robert Ltd.
a)
b) c)
Ordinary Shares (75% of Stevens) P & L A/C (75% of Pre Acq profits of 60) Goodwill on Consolidation Investment in Stevens Ordinary Shares (25% of Stevens) Minority Interest P & L A/C (25% of both Post and pre acq profits) Minority Interest
Credit
540 150 90 90
Ledger Accounts
Investment in Steven Ltd Balance $ 540,000 Ordinary shares of Steven Ltd. Profit and Loss of Steven Ltd. Goodwill on consolidation $ 450,000 45,000 45,000 540,000
540,000 Minority Interest To CBS $ 240,000 240,000 Consolidated Profit and Loss Account $ 525,000 Profit and Loss Balance of Harrison Ltd. Steven Ltd. (CPL) 525,000 Consolidated Profit and Loss of Group Steven Ltd. $ 45,000 Balance as per CBS of Steven Ltd. 225,000 Ordinary shares of Steven Ltd. Profit and Loss of Steven Ltd.
To CBS
Investment in Stevens 75% x $60,000 Consolidated profit and Loss account 75% x ($360,000 $60,000) Minority Interest 25% x $360,000
$ 360,000
90,000 360,000 Consolidation Worksheet Harrison CBS Steven & Robert $000 $000 600 360 96 1800 540 1056 735 360,000
Adjustments Debit $000 a450 b150 a45 c90 b150 c90 240 a540 Credit $000
CBS
Liabilities Ordinary shares Profit and loss Minority Interest Total Assets Investment in Steven
1500 300
336 2361
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540 780
Consolidated Balance sheet of Harrison Ltd. and of its subsidiaries Steven Ltd. and Robert Ltd. as at 31.12.x8 $ $ Sundry assets 2,280,000 Goodwill on consolidation ($36,000 + $ 45,000) 81,000 2,361,000 Ordinary shares of $1/-each 1,500,000 Consolidated profit and loss account 525,000 2,025,000 Minority interest ($ 96,000 + $ 240,000) 336,000 2,361,000
Now, the same illustration which involves so many journal, ledger and work sheet entries in five pages is presented simply in one page under Accounting Equation Method. Illustration -2 Multistage Method (Fig 000) Important Points: 1. Consolidate S with SS and then consolidate H with S and SS subgroup H holds 80% control in S. S holds 75% control in SS. The effective interest of H over SS is 60% (80%x75%) First Stage: Consolidation of S with SS Assets Liabilities
Details of Transaction First Stage Balance Sheet S Balance Sheet SS Adjustment of 80% of Control interest in SS With Creation of Goodwill Mino.Interest @ 20% Grand Total -S and SS Second Stage: Cons of H with S and SS Group Balance Sheet H Adj. Of 75% Control in S By H & creation of Goodwill Minority Interest @ 25% Total Investm ent In SS 300 -300 Investm ent In S Sundry Assets Good Will Total Assets Ordina ry Shares 600 300 -240 P&L A/c Pre Acq 60 30 -24 P&L A/c Post Acq 180 150 Minorit y Interest Total Liabiliti es
-6 60
-30 300
+96 96 1056
540 -540
1260 +45
1500 -450
300 -45
-15 0
-75 525
Consolidated Balance Sheet is prepared in the prescribed format which is as follows. It is evident from this presentation that answer is same for both methods.
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Consolidated Balance sheet of Harrison Ltd. and of its subsidiaries Steven Ltd. and Robert Ltd. as at 31.12.x8 $ $ Sundry assets 2,280,000 Goodwill on consolidation ($36,000 + $ 45,000) 81,000 2,361,000 Ordinary shares of $1/-each 1,500,000 Consolidated profit and loss account 525,000 2,025,000 Minority interest ($ 96,000 + $ 240,000) 336,000 2,361,000
Single Stage Method Step 1 Determine the Effective interest of the ultimate holding companys interest in the various subsidiaries. Step 2 Open one Investment Account Debit with: Holding companys interest in the subsidiary and the holding companys interest in the subsidiarys investment in the sub subsidiary. Credit with: The holding companys interest in the share capital and pre-acquisition reserves of the subsidiary and sub subsidiary. Step 3 Open one minority shareholders account: Debit with: The minority shareholders interest in the investment in the sub subsidiary. Credit with: The minority shareholders interest in the capital and reserves of the subsidiary and sub subsidiary. Answer The holding company holds 75% of the issued ordinary share capital of Steven Ltd. Steven Ltd. holds 80% interest in Robert Ltd. Therefore, Steven Ltd. has an indirect interest of 75% of 80% = 60% interest in Robert Ltd. Journal Entries (Fig in 000)
Debit 450 45 45 150 15 45 210 180 18 27 75 300 120 12 60 192 Credit
a)
b)
c)
d)
Ordinary Shares (75%of Stevens - 600) P & L A/C (75% of Stevens Pre Acq Profits) Goodwill on Consolidation Investment in Stevens Ordinary Shares (25% of Stevens 600) P & L A/C (25% of Stevens Pre Acq Profits -60) P & L A/C (25% of Stevens Post Acq Profits -180) Minority Interest in Stevens Ordinary Shares (60% = 80% of 75% = of Robert 300) P & L A/C (60% of Robert Pre Acq profits 30) Goodwill on Consolidation Minority Interest Investment in Robert Ordinary Shares (40% of Robert 300) P & L A/C (40% of Pre Acq Profits -30) P & L A/C (40% of Post Acq Profits 150) Minority Interest in Robert Investment in Stevens Ltd
540
Balance
$ 540,000
$ 450,000
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300,000 Minority Interest Investments in Robert Ltd 25% $300,000 To CBS $ 75,000 327,000 Ordinary shares of Stevens Ltd Ordinary Shares of Robert Ltd Profit and Loss of Steven Ltd. (15+60) Profit and Loss of Robert Ltd. (12+60)
402,000 Consolidated profit and Loss Account $ 525,000 Balance Of Harrison Ltd. Steven Ltd. Robert Ltd. 525,000 Profit and Loss Account Steven Ltd $ 45,000 Balance B/d 135,000 60,000 240,000 Profit and Loss Account Robert Ltd. $ 18,000 Balance B/d 90,000 72,000 180,000
To CBS
Cost control - 75% x $60,000 CPL - 75% x ($240,000 $ 60,000) MI - 25% x $240,000
$ 240,000
240,000
Cost control - 60% x $30,000 CPL - 60% x ($180,000 $ 30,000) MI - 40% x $180,000
$ 180,000
180,000
Consolidation Work Sheet Harrison Steven Robert $000 Liabilities Ordinary shares 1500 $000 600 $000 300
Adjustments Debit Credit $000 $000 a450 b150 c180 d120 a45 b60 c18 d72 c75 b210 d192
300
240
180
525
Minority Interest
327
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Total Assets Investments Sundry assets Goodwill on Consolidation Stevens Robert Total Grand Total of Debit Credit Adjustment
1800
840
480
Consolidated Balance sheet of Harrison Ltd. and of its subsidiaries Steven Ltd. and Robert Ltd. as at 31.12.x8 $ $ Ordinary shares of $1/- each 1,500,000 Consolidated profit and loss 525,000 Capital and reserves 2,025,000 Minority shareholders interest 327,000 2,352,000 Goodwill on consolidation 72,000 Sundry assets 2,280,000 2,352,000
Note:
The goodwill on consolidation and minority shareholders interest differ between the two methods. The difference is $9,000. In the single stage method the minority shareholders interest in the goodwill in the sub subsidiary is allocated to them. The minority shareholders of Steven Ltd. have a 25% interest in the goodwill of Robert Ltd. $36,000 x 25% = $9,000.
Now, the same illustration which involves so many journal, ledger and work sheet entries in five pages is presented simply in one page under Accounting Equation Method. Illustration 2 - Single Stage Method Important Points (Fig in 000) Investment by S in SS consists of both H share and minority share in 75:25 ratio
Details of Transaction Assets Invest Invest ment ment In In S SS 540 300 - 540 Sundry Assets Good will I Total Assets Ordina ry Shares 1500 600 300 -450 P&L A/c Pre Acq Liabilities P&L Minorit A/c y Post Interest Acq 300 180 150 Total Liabilit ies
Balance Sheet H Balance Sheet S Balance Sheet SS Adj. Of 75% control in S By H with Goodwill Minority Interest 25% Hs Interest in the investment Of SS 75% and its effective interest In SS shares and pre acq. Profits only 60% (80%x75%) Minority Interest in Investment of SS 25% Minority Interest in shares and profits of SS (100%-60%) 40%(effective) Grand Total
60 30 -45
-45
+210
-75
-75
-120
-12
-60
+192
2280
72
2352
1500
525
327
2352
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Please note the differences between multistage and single stage method in calculation of goodwill and minority interest. The difference is RM 9000. In single stage method, the minority interest in the goodwill in SS is allocated to them. The minority shareholders have a 25% interest in the goodwill of SS = 36000 x25% = 9000. A Consolidated Balance Sheet is prepared in the prescribed format which is as follows. It is evident from this presentation that answer is same for both methods.
Consolidated Balance sheet Of Harrison Ltd. and of its subsidiaries Steven Ltd. and Robert Ltd. as at 31.12.x8 $ $ Ordinary shares of $1/- each 1,500,000 Consolidated profit and loss 525,000 Capital and reserves 2,025,000 Minority shareholders interest 327,000 2,352,000 Goodwill on consolidation 72,000 Sundry assets 2,280,000 2,352,000
The old accounting system with journal and ledger entries consumed more time and space as journal entries will be recorded in journal book and ledger entries will be recorded in ledger book. Errors are hard to detect and to do this is time consuming as each transactions in the entry need to be thoroughly checked. This is because the accountant need to check each and every one of the transactions to identify if there is any wrong double entry. In this old accounting system errors are hard to correct. Accountants need to correct mistakes from the beginning (journal entry) to the Balance Sheet. This is a very messy job. Higher cost will be accrued, as more staff is required to prepare the full sets of accounts. For example, one employee will prepare the trade debtors account; one will prepare the trade creditors accounts etc. The author experimented this traditional system with a sample of 100 students who took average of 55 minutes to complete the illustration 2.
The company can reduce the cost in preparing a full set of accounts. This is because the company can just employ a few staff in preparing the financial statement. The author experimented the Accounting Equation Method with a sample of 100 students who took only average of 25 minutes to complete the illustration 2.
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12. Conclusion
The doublze entry system is based on recording the transaction value in debits and credits. The dual effect of each transaction is recorded in appropriate accounts. The basic accounting equation ie., Assets = Liabilities + Owners equity, must be equal. In the technology era efficient and effective accounting information systems are based on certain principles like cost effectiveness, usefulness and flexibility that is the future needs. When the world is using computerised system, why still need manual accounting system in preparing the accounts including consolidation of group financial statements. To understand what computerised accounting system do, still we need to understand how manual accounting systems work. The traditional accounting system of consolidation of group accounts, by using various T accounts and journals, involve time, cost, risk and errors. To achieve the goal of cost effectiveness, usefulness, flexibility, timeliness and above all to understand by non accounting personals in preparation of group financial statements the new accounting method in preparing the group consolidated financial statements called New Accounting Equation Method on consolidation can be used, which is very simple to follow since it is based on arithmetic equation of plus and minus. This can be achieved by employing fewer accounting employees, at lesser cost and produce the required group financial statements on time.