Paper Example on Consolidated Financial Statement

Executive Summary

80% of the equity share was acquired by ABC limited at the cost of 5,000,000 GBP on 31st December 2016. A review of goodwill impairment has been carried out. As of 31st December 2017, there was a goodwill impairment of 300,000 GBP. ABC Limited paid 250,000GBP on 31st December 2016 in respect of intercompany accountability. Unfortunately, XYZ did not update this in their accounts. This report:

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• Prepares and critically analyzes the consolidated funds of the organization from 31st December 2017;
• Constructs and evaluates the consolidated profit and loss account of the organization for the period that ended on 31/12/2017;
• Calculates and comments on the following ratios:
  • Return on company employed;
  • Net profit margin;
  • Current ratio;
  • Receivable correction period

Consolidated Financial Statement Overview

Consolidated financial statements refer to a combination of financial statements of a subsidiary company and its parent company (Barrett, 1976: p 10). Consolidated financial statements provide key information that helps to assess the overall health of the group of companies. The preparation of consolidated financial statements must adhere and meet the requirements set by the IFRS (IFRS 10 Consolidated Financial Statements) whereby a parent company is required to consolidate all its subsidiary companies (ACCA, 2018).

Consolidated Statement of Financial PositionAccording to the standards set out by IFRS 10: B86, three steps/procedures should be followed when preparing consolidated financial statements (ACCA, 2018). The first step entails combining assets, equity, liabilities, expenses, income, and cash flows of the parent company with that of the subsidiaries. The second step involves offsetting while the third step involves eliminating all intragroup liabilities, assets, equity, expenses, cash flows, and income relating to transactions carried out between the subsidiaries and the parent company (Deloitte, 2017).

The consolidated statement of financial position has two main types of items that are canceled out. Offsetting is carried out by adhering to the following procedures (IFRS 10: B86):

Investment in the subsidiary is treated as an asset by the parent. The share capital account cancels out the investment in subsidiary companies. The consolidated statement will only include the share capital account of the parent company.

If trading between companies which are in the same company happens, the receivable of another company will cancel out the payables of one company.

Goodwill Coming up on Consolidation

According to IFRS 10 and the IAS 38, goodwill should be considered as an intangible asset during the determination of the financial position and preparation of consolidated financial statement (PKF International Firm, 2015: 312-320). Goodwill arises when the cost of purchase of shares is unequal to the value of a company's shares (Dickerson, Gibson & Tsakalotos, 1997: p344). For example, if ABC buys shares of XYZ worth 40,000 sterling pounds for 60,000 sterling pounds, goodwill would be calculated as 20,000 sterling pounds.

Goodwill is calculated by following the steps outlined below:

• Transferring the fair value of consideration
• Adding the value of non-controlled interest at acquisition.
• Subtracting the ordinary share capital of the subsidiary company.
• Deducting the premium share of the subsidiary.
• Subtracting the retained earnings of the subsidiary company at acquisition date.
• Deducting the value adjustments at acquisition date.

Non-controlled interest (NCI)In the event that the parent company does not buy 100% of assets of the subsidiary company, the remaining proportion is controlled by an external investor/company and fall under the category of non-controlling interests. In other words, non-controlling interests refer to the proportion of assets that are relatable to outside investors. They are also known as minority interest because they have no control over decisions (PKF International Firm, 2015: 852). NCI is calculated by adding the fair value of NCI at acquisition date to shares of NCI that are post-acquisition retained earnings or other reserves. Non-controlling interests are presented by a parent company within equity in the consolidated statement of financial position, but separate from the equity of the investors of the parent company (IFRS 10:22). For instance, a parent company could buy 80% of XYZ enterprises. An outside investor comes and buys the remaining 20% of the new subsidiary XYZ. In this case, the outside investor is considered as a minority interest or a non-controlling interest.

Intra-group tradingIntra-group trading relates to trade relations between groups of companies. For example, ABZ Company can buy goods for a given price and sell them to XYZ Company in the same group for a higher price. Thus, ABZ will earn a profit, but XYZ will not make any profit in that transaction. XYZ Company will only earn profit if it sells the goods to an outsider company.

Control

An investor determines whether or not an entity is a parent company by evaluating whether it has control over one or more investees. When determining whether an entity controls an investee, all facts and contexts must be considered. (Deloitte, 2017). The guidelines set by IFRS 10 indicate that an investor controls an investee when it has likelihood of variable profits as a result of its involvement with the investee and has the capacity to manipulate those earnings using its power over the investee (IFRS 10: 5-6; IFRS 10: 8).

The guidelines set out by IFRS 10 on the consolidation of financial statement do not have significant differences from that stipulated by IAS 27 (Adhikari & Betancourt, 2008: p 73). The IAS 27 required that:

• The parent company should produce consolidated financial statements that are consistent with the accounting policies.
• Parent's and subsidiaries' items such as property, accountability, value, earnings, and costs that are similar should be merged.
• Elimination of intra-group properties, accountabilities, value, earnings, costs, and cash flows is entirely done, as are any profits that are not realized.
• There should be equity in presentation of non-controlling interests.

If the parent does not lose authority over the subordinate during the change of ownership interest of the parent in the subsidiary, then, the differences are accounted for within the equity.

A profit or deprivation on disposal arises when there is a loss in control, and the carrying value is revalued by any investment that is remaining.

There is offsetting of the carrying amount of the investment of the parent in each subordinate and the part of the parent of the equity of each subordinate, with any goodwill that is accounted for according to IFRS 3.

Combined Financial Statement PreparationAccording to Krimpmann (2015), a parent company is required to prepare consolidated financial statements by applying consistent accounting standards for similar transactions and other related events under similar circumstances (Elliot, Barry & Elliot 2007) [IFRS 10:19]. In case the following conditions are met as stipulated in IFRS 10: 4(a), the parent company is not required to present combined Financial Statements. They include:

• If the parent owns 100% of the subsidiary or the parent partially owns the subsidiary and the other owners including those without the right to vote have been informed and agreed to the parent's decision of not presenting consolidating financial statements.
• The public should not have traded its equity or debt in the foreign merchandise exchange, over the counter, domestic markets, and district and community markets.
• Its financial statements are filed or in the process of being registered with security commission or other regulatory organizations with intentions of giving any trade instrument in the stock market.
• If consolidated funds accessible for everyday use that are acceptable by IFRS are produced by the last or any transitional parent of the parent. This involves subsidiaries' consolidations or is one that is measured at a value that is fair through gain or loss in accordance with IFRS 10.

Processes of Consolidating

The consolidation procedures for consolidated financial statements require that (IFRS 10: B86):

• Products which are the same such as benefits, accountabilities, fairness, earnings, expenses and capital for both the parent and the subsidiary should be combined.
• Transfer quantity of the investment of the parent is eliminated in each subordinate and the portion of fairness of the parent.
• Benefits and accountability, integrity, earnings, prices and capital related to contracts between organizations of the group are done away with in full (intergroup transactions).

The consolidated accounts reports include the earnings and spending of a subordinate as from the time the parent gained control to the time the control of the parent entity ceased. The subsidiary income and expenses are established on the quantity of the benefits and accountabilities that are recognized in the consolidated financial statements at the acquisition date. [IFRS 10: B88].

The period of reporting of the parent and that of subsidiaries must be the same. Financial information which is prepared by the subsidiary based on consolidation must also be the same not unless they are not compatible. The most current consolidated account of the subordinate is utilized where the supposed financial information is not compatible. Important transactions or occasions between the period of reporting of the subsidiary and combined financial statements are adjusted for the effects of significant transactions. Importantly, consolidated accounts and subsidiary money statements' dates differ...