Group accounts

IFRS 10 · Consolidating subsidiaries

Control means adding everything line by line, as one company.

Draft: not yet reviewed by a teacher

Why it exists

The parent's shareholders own more than the parent's own assets: they own a business the parent controls. The parent's own statements would show only an investment. Consolidation shows everything the group manages and stops profit being created by trading inside the group.

Key rules

Control: power over the investee, exposure to variable returns from it and the ability to use the power to affect those returns. Usually more than 50% of the voting shares.
Assets, liabilities, income and expenses are added in full (100%) even when the holding is less; other owners' share is the non-controlling interest (NCI).
Goodwill (under IFRS 3) = consideration transferred + NCI − fair value of the subsidiary's net assets at acquisition. Shares issued as consideration are at their market price at the acquisition date. NCI is measured at fair value or at its proportionate share of net assets; FA uses fair value.
Group equity: share capital is the parent's only. NCI at the reporting date = NCI at acquisition + its share of the subsidiary's post-acquisition profit. Group retained earnings = the parent's + its share of subsidiaries' (and associates') post-acquisition profit − PURP where the parent was the seller.
Net assets at acquisition are at fair value: add any fair value uplift (for example on land).
Intra-group balances (receivables and payables between group companies), sales and purchases are cancelled.
Unrealised profit (PURP) on goods still held in the group is removed. For a mid-year acquisition, include the subsidiary's profit only from the acquisition date.

Examples

A supermarket chain buys 80% of a dairy in Quba for 600,000. At acquisition: share capital 200,000, retained earnings 300,000, land worth 50,000 more than its carrying amount. NCI at fair value 140,000.

Net assets: 200,000 + 300,000 + 50,000 = 550,000
Goodwill: 600,000 + 140,000 − 550,000 = 190,000
With proportionate NCI: 20% × 550,000 = 110,000; goodwill 600,000 + 110,000 − 550,000 = 160,000

Goodwill under both NCI measures

The parent sold goods to the subsidiary for 24,000; a quarter are still in the subsidiary's inventory at the year end.

20% mark-up on cost: profit 24,000 × 20/120 = 4,000; PURP 4,000 × 1/4 = 1,000
20% margin: profit 24,000 × 20% = 4,800; PURP 4,800 × 1/4 = 1,200

The subsidiary was bought on 1 April; its profit for the year was 120,000, earned evenly.

Post-acquisition profit: 120,000 × 9/12 = 90,000; NCI share 20% × 90,000 = 18,000

PURP and a mid-year acquisition

How it works

The group is one economic entity. A sale from parent to subsidiary is a move from one warehouse to another, not a sale. Until the goods are sold outside the group, the profit on them is not earned: it is removed from inventory and from the seller's retained earnings.

A mark-up is on cost; a margin is on selling price. With a 20% mark-up the profit in a price of 24,000 is 24,000 × 20/120; with a 20% margin it is 24,000 × 20%.

Traps

Taught in the course

Key rules

Control: power over the investee, exposure to variable returns from it and the ability to use the power to affect those returns. Usually more than 50% of the voting shares.

Assets, liabilities, income and expenses are added in full (100%) even when the holding is less; other owners' share is the non-controlling interest (NCI).

Goodwill (under IFRS 3) = consideration transferred + NCI − fair value of the subsidiary's net assets at acquisition. Shares issued as consideration are at their market price at the acquisition date. NCI is measured at fair value or at its proportionate share of net assets; FA uses fair value.

Group equity: share capital is the parent's only. NCI at the reporting date = NCI at acquisition + its share of the subsidiary's post-acquisition profit. Group retained earnings = the parent's + its share of subsidiaries' (and associates') post-acquisition profit − PURP where the parent was the seller.

Net assets at acquisition are at fair value: add any fair value uplift (for example on land).

Intra-group balances (receivables and payables between group companies), sales and purchases are cancelled.

Unrealised profit (PURP) on goods still held in the group is removed. For a mid-year acquisition, include the subsidiary's profit only from the acquisition date.