Consolidated Statement of Financial position

We have to combine elements of the statement of financial position of parent, subsidiary and associate in order to make a single statement that gives a view of the entire group. Below you will find rules for preparing the Consolidated Statement of Financial Position. We have presented rules of consolidation in such a sequence which will be helpful to you in answering exam question.

Steps for preparing Consolidated SOFP

Step 1: Draw the layout of the consolidated statement of financial position. You should

keep space of two pages for your statement of financial position before you start your workings. Your layout should be as follows:
Name of parent company

Parents Group Consolidated Statement of Financial Position as at DD/MM/YYYY Details $

Step 2: Start doing workings. Leave two pages for the statement before workings. Layout of working is shown later. From steps 3 to 8 are the workings. Step 3: Do Working 1: Determine the group structure by calculating parent control percentage over subsidiary and associate. Example P acquires 8000000 $1 shares of S and 3000000 $1 shares of A. S and A both have a share capital of $10,000,000. Draw the group structure?
Answer: Calculation, % of Subsidiary = 8/10 x 100 = 80% % of Associate = 3/10 x 100 = 30% 80% S P 30% A

This structure is drawn in the working section of your answer

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 Step 4: Do Working 2: Calculate total consideration (investment) made by the parent in order to purchase subsidiarys shares. There are many forms of consideration a parent can make. They are: Cash consideration Deferred consideration Contingent consideration Share for share Exchange It is always possible that more than one form of consideration has been made by the parent and in that case we have to add all the consideration together. See the example below. Total consideration in subsidiary is calculated as it is required in the calculation of goodwill of the subsidiary.

Example
Pink ltd acquired 8000 shares out of 10000 share capital of Sink ltd. Pink paid initial cash consideration of $1 for every share acquired. Additionally Pink exchanged 2 shares for every 4 shares acquired in Sink when the market price of Pink share is $3/share. It was also agreed that Pink would pay a further $2m in three years time. Current interest rates are 10% pa. The terms of the business combination further provide for the payment of an additional $2 million after 2 years if the performance of Sink reaches a specified level in the two years period. The directors of Pink estimated that the fair value of the contingent consideration at current reporting date is $1 million. Calculate the total consideration made by parent at reporting date? Answer: Investment in Sink:
$

Cash consideration ($1 x 8000) Share exchange (8000/4 x 2 x $3) Deferred consideration [$3,000,000 x 1/(1+0.1)] Contingent consideration Investment in Sink

8,000 12,000 2,253,944 1,000,000 3,273,944

This calculation is shown in the working section of your answer.

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 Step 5: Do Working 3: If there is an associate, carrying the value of investment in associate is also to be calculated. Investment in associate is shown under the non -current asset heading in the consolidated statement of financial position. It is calculated by following method: Cost of investment in Associate: $ Cost of investment* XXX (+) Parents share of post acquisition profit XXX (-) Impairment of investment in associate XXX (-) PUP** (If parent is the seller) XXX Carrying value of investment in associate XXX *Cost of investment can be found in parents statement of financial position under noncurrent asset will be told directly in the question. **PUP is the short form of Provision for unrealized profit. Step 6: Do Working 4: Perform calculations for intra-group and fair value adjustments. Make sub-headings by giving name of your calculation for example, URP (unrealized profit) for intra-group transaction, additional/reduced depreciation for fair value, etc.

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 Step 7: Do Working 5: Calculate subsidiarys net asset value for both the acquisition date and reporting date. It can be calculated as shown below:

Details

Share Capital Reserves: Share Premium Revaluation Reserve Retained Earning General Reserve Fair value adjustment*: Additional/(Excess) value of Non-Current assets (W4) Revaluation Excess/Reduced Depreciation (W4) PUP in goods or non-current asset (if Subsidiary is seller) (W4) Net Asset Post acquisition profit** (A-B)

Subsidiarys Net Asset Acquisition date X X X X X X/(X)

Reporting date

X X X X X/(X) X/(X) X/(X) (X)

A C

*Fair value adjustments are made depending on the situation mentioned in the question. Detail explanation is mentioned later. **Difference between the value of subsidiarys net asset i.e. (A-B) is the post acquisition profit of subsidiary i.e. C. This figure will be needed for calculating group retained earning and NCI at reporting date. Step 8: Do Working 6: Calculate Goodwill. Follow the proforma below for calculating value of goodwill that needs to be recognized at the reporting date.

Goodwill Calculation Details Cost of Investment (W2) (+) NCI value @ acquisition* (No. of shares x market price per share) or (NCI % x fair value of Ss net asset) (-) Fair value of Subs net asset @ acquisition Goodwill @ acquisition (-) Impairment of goodwill Carrying value of goodwill

Reporting Date ($) XX X

(X) X (X) XX

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 Step 9: Do Working 7: Calculate NCI value at the reporting date by following the proforma below:

$ NCI value at acquisition X NCI % of post-acquisition profit* X NCI % of goodwill impairment (for fair value method only) X NCI value at reporting date XX *Post-acquisition profit is calculated in the net asset calculation table which is shown later. Step 10: Do Working 8: Calculate Group retained earnings at the reporting date by following the proforma below: Group Retained Earnings Details Parents full retained earning Less: Unrealized Profit(URP) for intra-group sale of goods (if sold by Parent to Subsidiary) Less: Unrealized Profit(URP) for intra-group sale of Non-current asset (if sold by parent to subsidiary Less: Parents % of URP due to transaction between parent and associate (for both sale of goods and non-current asset, between parent & associate, whoever the seller is) Less: Parent % of goodwill impairment Less: Parent % of impairment of investment in associate Less: Unwinding discount on deferred consideration Less: Loss on Parents other investment for fair value valuation Add: Gain on Parents other investment for fair value valuation Add: Parents % of Subsidiarys post acquisition profit (calculated in net asset calculation Add: Parents % of Associates post acquisition profit Group retained earning @ reporting date

NCI value at reporting date Details

$ X (X) (X) (X)

(X) (X) (X) (X) X X X XX

Step 11: Besides the workings of consolidation, students may need to perform other workings for Lease, construction contracts, financial assets and liabilities, tax and deferred tax, asset impairment etc. Give each working a sequential number so that a reference can be made in the actual statement.

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 Step 12: Go back to the consolidated statement of financial position layout which you have drawn as per step 1. Now we shall start writing our statement of financial position in the following manner: I. Non-current Assets: For each tangible non-current asset, add both parents and subsidiarys carrying value which is shown in their respective statement. Also add or deduct any adjusting amount that relates to intra-group sale of non-current asset and non current asset fair value issues. You might have done some workings in W4 regarding these adjustment, therefore dont forget to refer it to your workings by just writing W4. Making reference to your workings makes easier for the examiner to check your performance. Goodwill: We have calculated the value of goodwill at reporting date in our working 6. Since Goodwill is a non-current asset therefore under non-current asset heading, goodwill is shown by making a reference to your working. Investment: In the parents statement of financial position, investment figure is shown. It may comprise 3 areas of investment made by parent; they are investment in subsidiary, investment in associate and other investment. Some time separate figures are shown for each investment which makes our task easier. - Investment in Subsidiary needs to be eliminated thus not included in consolidation. - Investment in Associate calculation is already done in working 3. It is shown separately from other investment. - Other investment of parent is adjusted for any gain or loss arising by recognizing them at their fair value and then added with subsidiarys all of the investments. Subsidiarys investments are also adjusted for any gain or loss arising due to fair value recognition. See earlier in this chapter for details. Entire separate workings can be shown for other investment. Intangible Assets: All the intangible asset of parent shall be shown in the statement at their carrying value. Any intangible asset of subsidiary shall also be shown in the consolidated statement of financial position at their fair value less accumulated amortization (i.e. total amortization from the date of acquisition till reporting date). II. Current Assets: For each current asset, add both parents and subsidiarys amount together and deduct any intra-group transaction adjustments. If you have done any workings with these regards, then make reference of your working.

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III. Equity: Under the equity section of consolidated statement of financial position, only parents share capital, share premium and other reserves of parent are shown. Subsidiarys share capital, share premium and other reserves are not included in consolidated statement of financial position. Group retained earning: Group retained earning is calculated in working 8. This group retained earning is shown under equity section after share and share premium. NCI: We have already calculated NCI value at reporting date in working 7. After group retained earning, NCI value is shown in the statement. IV. Non-current Liability: For each non-current liability, both parents and subsidiarys non-current liabilities are added together and shown. Differed Consideration: Total liability for deferred consideration is shown under non-current liability. You may show separate workings for your calculation of deferred consideration and refer to your workings. V. Current liability: For each current liability add both parents and subsidiarys amount together and add/deduct any intra-group transaction adjustments. If you have done any workings with these regards, then make reference of your working.

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