How to prepare a group statement of financial position

| February 13, 2013 | 0 Comments

Tom Clendon, author of A student’s guide to group accounts (published by Kaplan Publishing) demonstrates how to prepare a group statement of financial position.

When preparing group statements of financial position the basic rule with the assets and liabilities of the subsidiary is that they will cross cast. In exam questions often the majority of the marks are allocated for the consolidation adjustments around goodwill, NCI, post-acquisition profits  and fair value adjustments.

Let’s have a look at an exercise where these issues all feature.

Group accounts

Two years ago a parent company paid $90,000 for an investment of 80% of a subsidiary’s equity when the retained earnings were $25,000. An extract of the statement of financial positions at the reporting date shows;

 

Parent

Subsidiary

$

$

Ordinary shares ($1)

25,000

15,000

Retained earnings

100,000

40,000

125,000

55,000

 

The fair value of the NCI at the date of acquisition was $20,000.

It is group policy to measure the NCI at acquisition at fair value.

For consolidation purposes an upwards fair value adjustment of $25,000 was made on certain items of property plant and equipment which at the date of acquisition had a remaining life of five years.

By the reporting date goodwill has been impaired by $1,000.

Required

a) Calculate the goodwill at the reporting date.

b) Prepare the equity section of the group statement of financial position.

Now in approaching such a question there are five regular workings that have to be processed. It is first necessary to prepare a group structure to ensure that we have noted the parent’s and the NCI’s interest in the subsidiary and noted how long the subsidiary has been a member of the group.

W1 Group structure

Parent
Two years ago 80% / 20% NCI
Subsidiary

Our next working is to establish the fair value of the net assets of the subsidiary both at the date of acquisition and at the reporting date. The net assets of the subsidiary are represented by its equity. Note that the subsidiary’s net assets at the date of acquisition need a fair value adjustment on its property plant and equipment. This adjustment is still necessary at the reporting date as the asset is still held, in fact, at the reporting date it also creates the additional adjustment of more depreciation.

W2 Net assets

At acquisition

At reporting   date

$

$

Ordinary shares

15,000

15,000

Retained earnings

25,000

40,000

Fair value adjustments on PPE

25,000

25,000

Less deprecation (1/5 x 25,000 x 2 years)

(10,000)

Total

65,000

70,000

From the net asset working we can see that the rise in the net assets since the subsidiary was acquired is $5,000. This is known as the post-acquisition profits of the subsidiary and is allocated 80% to the parent w5 and 20% to the NCI w4. Further we can note that the net assets of the subsidiary at acquisition is $65,000, a key figure for the calculation of goodwill which is our next working. The goodwill arising on consolidation is subject to an annual impairment review. Where the NCI at acquisition has been measured at fair value then the goodwill is said to be the full goodwill of the group and as such any impairment loss has be allocated between the parent w5 and the NCI w4 in the normal proportions that they share profits and losses.

W3 Goodwill

$

FV of Parent’s investment

90,000

FV of NCI

20,000

FV of Net assets

(65,000)

Goodwill  at acquisition   – full

45,000

Less impairment loss (80% / 20%)

(1,000)

Goodwill at the reporting date

44,000

Next we determine the NCI at the reporting date. NCI is part of equity (the ownership) and so the balance at the date of acquisition will increase with its share of any profits and decrease with any share of losses that we have seen above.

W4 NCI

$

Opening balance

20,000

Plus NCI% of post -acquisition profit (20% x 5,000)

1,000

Less NCI% impairment loss on full goodwill (20% x 1,000)

(200)

20,800

Our final working is the retained earnings of the group.

W5 Retained earnings

$

Parent

100,000

Plus parent’s % of post acquisition profit (80% x   5,000)

4,000

Less parent’s % of impairment loss on full goodwill   (80% x 1,000)

(800)

103,200

To recap, in answer to the requirements

a) Goodwill at the reporting date; per w3 above , $44,000

b) Equity section of the group statement of financial position

                  $

Ordinary shares (Parent only)

25,000

Retained earnings w5

103,200

NCI w4

20,800

149,000

Tom Clendon

twitter @tomclendon

Tom Clendon’s second edition of A student’s guide to group accounts (published by Kaplan Publishing) is now available at the usual outlets and www.kaplanbooks.co.uk.

 

 

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