INTRODUCTION TO GROUP ACCOUNTING

How to Prepare consolidated Financial Statements

Share of ownership or CONTROL approach will determine whether or not an entity is a subsidiary
undertaking. Other entities such as associates, joint ventures and simple investments that are not
subsidiaries are not consolidated, instead they are accounted for according to other rules (IAS 28,
IAS 12, IFRS9)
Let us consider two companies, Emerson Education(EE) & financial Training Centre(FTC)
If EE owns >50% shares of FTC, then EE must consolidate FTC results (Financial statements) as
per IFRS10. In this case EE becomes parent company and FTC becomes subsidiary. Generally, FTC
must prepare consolidated financial statement since it controls FTC. No control no consolidation
(IFRS 10)
Again, if EE owns 40% shares of BPP, EE is not required to consolidate BPP Financial statements
since it does not control it. BPP will be accounted under the rules of IAS 28(investment in
associates)
IFRS10 provides the following consolidation procedures
Similar items like assets, liabilities, income and expenses should be combined (added) line by line.
Other procedures are
1. Inter group transactions and balances are cancelled.
2. Any profits resulting from inter group transactions are eliminated from the consolidated
accounts. (For example this would include non-current assets, inventory, investments etc.
transferred within the group).
3. Any profits resulting from inter group transactions are eliminated from the consolidated
accounts. (For example this would include non-current assets, inventory, investments etc.
transferred within the group).
4. Cost of investment in subsidiary is compared to fair value of assets and liabilities at the date
the shares in the subsidiary were acquired and the difference is goodwill on consolidation.
The pre-acquisition retained earnings of the subsidiary are eliminated from the consolidated
accounts.
5. Only post-acquisition profits of the subsidiary should be included in the consolidated
retained earnings of the group.
6. If a subsidiary pays a dividend out of pre-acquisition profits the parent deducts the dividend
received from the cost of investment in the subsidiary. This means the dividend received by
the parent is not distributable to its shareholders. Whereas if the subsidiary pays a dividend
out of post-acquisition profits it is treated as investment income by the parent and will be
added to distributable retained earnings.
7. If non-current assets are transferred from one group entity to another, adjustments may be
required so that any profit or loss arising on the transfer is eliminated and the depreciation
charge is adjusted so that it is based on the cost of the asset to the group or its valuation (if a
valuation policy is adopted).
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Non-controlling interest
Non-controlling interest adjustments occur when the parent does not own 100% of the subsidiary.
In the consolidated statement of profit or loss, non controlling interest is that proportion of the
results for the year not attributable to parent Is disclosed on the face of the consolidated statement
of profit or loss underProfit for the year.
In the consolidated statement of financial position, 100% of the subsidiarys assets and liabilities,
after eliminating intergroup balances, are brought in together with a liability to represent that part
of the net assets which are controlled but not owned by the parent.
Goodwill in consolidated financial statements
Goodwill arises where an undertaking is purchased for more than the fair value of its net assets. The
goodwill is subject to impairment reviews as referred to in IAS36
Negative goodwill in consolidated financial statements
Negative goodwill arises where an entity is purchased for less than the fair value of its net assets.
FRS 10 requires the following treatment of negative goodwill:
Negative goodwill should be recognised in the statement of profit or loss as income

SEMINAR QUESTION 1
The following are the income statements of Emerson plc and FTC Ltd. for the year ended 31
December 2015:
Prepared by Japhary Shaibu M CPA(T)
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Emlcerson
Plc
TZS 000

FTC Ltd
TZS 1000

Revenue

10,050.00

3,300.00

Cost of sales

(6,700.00)

Gross profit

3,350.00

Distribion expenses

(550.00)

(275.00)

Administration expenses

(350.00)

(125.00)

Finance cost

(50.00)

(10.00)

Profit before Tax

2,400.00

690.00

Income Tax 30%

(720.00)

(207.00)

(2,200.00)
1,100.00

Profit for the year

1,680.00
483.00
Required:
Prepare a consolidated income statement for the year ended 31 December 2015 Given that
Emerson plc acquired all the equity shares of FTC Ltd. on the 31 December 2014.
Prepare a consolidated income statement for the year ended 31 December 2015 Given that
Emerson plc acquired all the equity shares of FTC Ltd. on the 31 March 2015.
Prepare a consolidated income statement for the year ended 31 December 2015 Given that
Emerson plc acquired 80% of all equity shares of FTC Ltd. on the 31 December 2014
Prepare a consolidated income statement for the year ended 31 December 2015 Given that
Emerson plc acquired 80% of all equity shares of FTC Ltd. on the 31 March 2015

Prepared by Japhary Shaibu M CPA(T)

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