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Antonio Marra
Annalisa Prencipe
8
EXERCISES ON CONSOLIDATING ACCOUNTING
1
Understanding and Preparing IFRS Consolidated Financial Statements
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
We thought it was a good idea to close the book with a chapter fully dedicated to
exercises. Consolidated accounting, as many other issues in accounting and in other
corporate studies, is a topic that requires some practice to fully interiorize the main
mechanisms behind its representation. The exercises give the reader a nice way to
get used to the different aspects covered in the present book and are presented in an
increasing order of difficulty. Each exercise has its set of individual financial
statements and few empty columns to allow the reader to exercise before looking at
the solutions, which are showed at the end of each exercise and are meant to be
reasoned to guide the reader through all the main passages of the exercise.
We can decide to prepare consolidated financial statements right on the date of the
acquisition or later (typically at the end of each accounting period after the
acquisition takes place). Lets start by considering the case of consolidation on the
date of the acquisition. This is the simplest case since no intra-group transactions
have taken place yet, so the only consolidation entry to be made is the elimination of
the investment and the subsidiary equity. Also, there is no consolidated income
statement on the date of the acquisition. Consolidated income statement, actually,
shows the consolidated results reached by the holding company and its subsidiaries
as a group after the acquisition has taken place. On the date of the acquisition, there
is no operation performed by the group yet, so there is no need to prepare the
income statement.
Lets now give some examples.
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Alpha
Beta
1,000
1,500
Intangible assets
3,000
2,000
Investment
2,300
Total assets
6,300
3,500
3,000
1,500
600
500
2,700
1,500
6,300
3,500
Aggregate
(1)
Consolidated
Non-current assets
Owners equity
Common stock
Retained earnings
NC Interests
Liabilities
Deferred tax liabilities
On the same date, the fair value of assets and liabilities of BETA equals their book
value, except for plants, whose fair value is 600 higher than the carrying amount as
illustrated in the following prospect:
Book Value
Fair Value
Plants
1,500
2,100
Total
1,500
2,100
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Consider that the tax rate applied by the two companies is 50%. Prepare the
consolidated balance sheet on the date of the acquisition.
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 1 SOLUTION
According to our steps (see Chapter 5), the first thing to do is to compute the
Aggregate column as the plain sum, line by line, of each item in the individual
financial statement. Since the exercise mention nothing about it, we assume that the
individual financial statements are already uniform so that we can proceed right to
the consolidation adjustments, that is step #4a of Chapter 5, which we perform in
column (1). Finally, we will sum up, again line by line, the columns Aggregate and
(1) to get the requested consolidated balance sheet.
To properly understand the process of step #4a, we need to break down the price
paid for the acquisition in all its determinants. The consideration paid for the
investment is ideally attributable to the following components:
a) the book value of controlled companys equity;
b) any change in assets and/or liabilities values (i.e. any surplus between the
acquired assets and/or liabilities fair values and their book values);
c) the tax effects on those changes;
d) Goodwill (if any).
In the exercise at hand, the purchase price can be broken down as follows:
a) BETAs Equity
2,000
b) Changes in Plants
600
c)
(300)
d) Goodwill
Consideration paid
2,300
Where:
a) is the equity of BETA (Common Stock + Retained earnings): 1,500 + 500 = 2000;
b) is the difference between BETAs plants fair value and their book values: 2,100
1,500 = 600;
c) is the deferred tax effect on BETAs plants, computed as the marginal tax rate
(50%) and the surplus of point b) (600): 50% 600 = 300
5
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
d) is the Goodwill that justifies eventual difference between the consideration that is
paid to acquire company BETA and what can be separately recognized among the
BETAs assets, net of the deferred tax effect:
The spreadsheet below shows the elimination of the investment for ALPHA on the
date of acquisition:
BALANCE SHEET
Alpha
Beta
Aggregate
(1)
Consolidated
1,000
1,500
2,500
600
3,100
Intangible assets
3,000
2,000
5,000
Investment
2,300
Total assets
6,300
Non-current assets
5,000
2,300
(2,300)
3,500
9,800
(1,700)
8,100
3,000
1,500
4,500
(1,500)
3,000
600
500
1,100
(500)
600
Owners equity
Common stock
Retained earnings
NC Interests
Liabilities
Deferred tax liabilities
300
2,700
1,500
4,200
6,300
3,500
9,800
300
4,200
(1,700)
8,100
The Journal Entries of the elimination of the investment are shown in the box below:
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Debit
Beta equity (SE)
2,000
PPE (+A)
600
Investment in B (A)
Deferred tax liabilities (+L)
Credit
2,300
300
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Alpha
Beta
1,000
1,500
3,000
2,000
Aggregate
(1)
Consol.
Non-current assets
Property plant and equipment
Goodwill
Intangible assets
Deferred tax assets
Investment
2,700
Total assets
6,700
3,500
3,000
1,500
600
500
3,100
1,500
6,700
3,500
Owners equity
Common stock
Retained earnings
NC Interests
Liabilities
Deferred tax liabilities
On the same date, the fair value of assets and liabilities of BETA equals their book
value, except for its plants, whose fair value is 1.000 higher that the carrying amount,
and its provisions, whose fair value is 200 higher than their book value. The
difference between the cost of the investment and the owners equity is recorded as
goodwill.
8
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Book Value
Fair Value
1,500
2,500
1,500
1,700
TOTAL
3,000
4,200
Given that the tax rate applied by the two companies is 50%, prepare the
consolidated financial statements on the date of the acquisition.
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 2 SOLUTION
As in the previous exercise, we first compute the Aggregate column by summing,
line by line, each item of the individual statements. Again, we assume that financial
statements are uniform so that we can start form step #4a (Elimination of parents
investment, equity and recognition of value increase in subsidiaries assets and liabilities)
and break down the price paid for the acquisition in all its determinants. The
consideration paid for the investment is then attributable to the following
components:
a) the book value of controlled companys equity;
b) any change in assets and/or liabilities values (i.e. any surplus between the
acquired assets and/or liabilities fair values and their book values);
c) the tax effects on those changes;
d) Goodwill (if any).
In the exercise at hand, the purchase price can be broken down as follows:
a) BETAs Equity
2,000
1,000
200
c)
(400)
d) Goodwill
Consideration paid
300
2,700
Where:
a) is the equity of BETA (Common Stock + Retained earnings): 1,500 + 500 = 2000;
b1) is the difference between BETAs plants fair value and their book values: 2,500
1,500 = 1,000;
b2) is the difference between BETAs provisions fair value and their book values:
1,700 1,500 = 200;
c) is the deferred tax effect on BETAs plants, computed as the marginal tax rate
(50%) and the surplus of point b): 50% [1,000 + (200)] = 400
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Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
d) is the Goodwill that justifies eventual difference between the consideration that is
paid to acquire company BETA and what can be separately recognized among the
BETAs assets and liabilities, net of the deferred tax effect: 2,700 100% {2000 +
[(1,000 200) (1 50%)]} = 2,700 {2,000 + 400} = 300.
The spreadsheet below shows step #4a for ALPHA, on the date of acquisition:
BALANCE SHEET
Alpha
Beta
Aggregate
(1)
Consol.
1,000
1,500
2,500
1,000
3,500
300
300
Non-current assets
Property plant and equipment
Goodwill
INTANGIBLE assets
3,000
2,000
5,000
5,000
100
100
2,700
-2,700
Investment
2,700
Total assets
6,700
3,500
10,200
-1,300
8,900
3,000
1,500
4,500
-1,500
3,000
600
500
1100
-500
600
Owners equity
Common stock
Retained earnings
NC Interests
500
500
3,100
1,500
4,600
200
4,800
6,700
3,500
10,200
-1,300
8,900
The Journal Entries of the discussed step are shown in the box below:
Debit
11
Credit
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
2,000
PPE (+A)
1,000
100
Goodwill (+A)
300
Investment in B (A)
2,700
Provisions (-L)
200
500
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Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Alpha
Beta
1,000
1,500
3,000
2,000
Aggregate
(1)
Consol.
Non-current assets
Property plant and equipment
Goodwill
Intangible assets
Deferred tax assets
Investment
2,700
Total assets
6,700
3,500
3,000
1,500
600
500
3,100
1,500
6,700
3,500
Owners equity
Common stock
Retained earnings
Net earnings
NC Interests
Liabilities
On the same date, the fair value of assets and liabilities of BETA equals their book
value, except for its buildings, whose fair value is 2,000 higher that the carrying
amount.
Book Value
13
Fair Value
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
1,500
3,500
TOTAL
1,500
3,500
Assuming a tax rate of 50%, prepare the consolidated balance sheet on the date of
the acquisition.
14
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 3 SOLUTION
The situation is similar to the ones depicted in Exercise 1 and 2 so the same
assumptions apply and we start from step #4a. The most relevant difference in the
present case is that, as we are going to see, the price paid is less than the sum of the
acquired assets and equity (i.e. we end up with a negative goodwill).
In the exercise at hand, the purchase price can be broken down as follows:
a) BETAs Equity
2,000
b) Changes in PPE
2,000
c)
(1,000)
d) Goodwill
Consideration paid
(300)
2,700
Where:
a) is the equity of BETA (Common Stock + Retained earnings): 1,500 + 500 = 2000;
b) is the difference between BETAs PPE fair and book values: 3,500 1,500 = 2,000;
c) is the deferred tax effect on BETAs PPE: 50% (2,000) = 1,000
d) is the Goodwill that justifies eventual difference between the consideration that is
paid to acquire company BETA and what can be separately recognized among the
BETAs assets and liabilities, net of the deferred tax effect: 2,700 100% {2000 +
[2,000 (1 50%)]} = 2,700 {3,000} = (300). As we can see, this is a case of negative
goodwill. As noticed in chapter 6, sometimes the acquiring company has higher
bargaining power or negotiation skills then the selling entity; it can also be the case
that the selling company is acting under compulsion to complete the deal, so that the
acquiring company is able to size the deal at a more convenient price. After double
checking the purchase price allocation procedure as required by IFRS 3 [IFRS 3, par.
36], the negative difference is recognized as a gain in the acquirers income
statement.
The spreadsheet below shows step #4a for Alpha, on the date of acquisition:
15
Carlo Gallimberti
Antonio Marra
BALANCE SHEET
Annalisa Prencipe
Alpha
Beta
Aggregate
(1)
Consol.
1,000
1,500
2,500
2,000
4,500
Non-current assets
Property plant and equipment
Goodwill
Intangible assets
3,000
2,000
5,000
5,000
Investment
2,700
2,700
-2,700
Total assets
6,700
3,500
10,200
-700
9,500
3,000
1,500
4,500
-1,500
3,000
600
500
1,100
-500
600
300
300
Owners equity
Common stock
Retained earnings
Net earnings
NC Interests
Liabilities
Other Current and non-current liabilities
(included deferred tax liab.)
3,100
1,500
4,600
1,000
5,600
6,700
3,500
10,200
-700
9,500
The Journal Entries of the discussed step are shown in the box below:
Debit
Beta equity (SE)
2,000
Property (+A)
2,000
Credit
Investment in B (A)
2,700
1,000
300
16
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
On Dec. 31, X company ALPHA buys 90% of shares in company BETA. The cost of
the investment is 2,100. The balance sheets of the two companies on the date of the
acquisition are reported in the worksheet.
BALANCE SHEET
Alpha
Beta
Aggregate
(1)
Consol.
Non-current assets
Goodwill
Investments
2,100
Patents
200
Current assets
Other assets
4,000
3,300
Total assets
6,100
3,500
3,000
1,500
600
500
2,500
1,500
6,100
3,500
Owners equity
Common stock
Retained earnings
NC Interests
Liabilities
On the same date, the fair value of assets and liabilities of BETA equals their book
value, except for patents, whose fair value is 200 higher that the carrying amount.
17
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
The difference between the cost of the investment and the owners equity is recorded
as goodwill.
Book Value
Fair Value
Patents
200
400
TOTAL
200
400
Consider that the tax rate applied by the two companies is 50% and prepare the
consolidated financial statements on the date of the acquisition according to IFRS 3,
assuming that:
A. the company recognizes only the goodwill acquired by the parent company
B. the company applies the full goodwill method. In such a case, assume that
the fair value of the non-controlling interests is 300.
18
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 4 SOLUTION A
First, we need to prepare the Aggregate balance sheet of the company in the usual
way. Since individual financial statements are already uniform, we can proceed right
to the consolidation adjustments and then to the consolidated statements.
To properly understand the process, we need to break down the price paid for the
acquisition in all its determinants. The consideration paid for the investment is
attributable to the following components:
a) the book value of controlled companys equity;
b) any change in assets and/or liabilities values (i.e. any surplus between the
acquired assets and/or liabilities fair values and their book values);
c) the tax effects on those changes;
d) Goodwill (if any).
b)
180
c)
(90)
d)
Goodwill
210
Consideration paid
1,800
2,100
Where:
a) is the equity of BETA (Common Stock + Retained earnings): 90% (1,500 + 500)
= 1,800;
b) is the difference between BETAs Patents fair and book values: 90% (400 200)
= 180;
c) is the deferred tax effect on the surplus of BETAs Patents: 50% (180) = 90;
d) is the Goodwill that justifies eventual difference between the consideration that is
paid to acquire company BETA and what can be separately recognized among the
19
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
BETAs assets and liabilities, net of the deferred tax effect: 2,100 90% {2,000 +
[200 (1 50%)]} = 2,100 90% {2,100} = 210.
Moreover, since the participation is lower than 100%, we also need to recognize noncontrolling interests: 10% [2,000 (equity Beta) + 200 (gross surplus on patents) 100
(surplus tax effect)] = 210.
The spreadsheet below shows the Step #4 for Alpha, when consolidated financial
statements (we prepared only the balance sheet) are due:
BALANCE SHEET
Alpha
Beta
Aggregate
(1)
Consol.
210
210
2,100
-2,100
200
200
400
Non-current assets
Goodwill
Investments
2,100
Patents
200
Current assets:
Other assets
4,000
3,300
7,300
7,300
Total assets
6,100
3,500
9,600
-1,690
7,910
3,000
1,500
4,500
-1,500
3,000
600
500
1,100
-500
600
210
210
Owners equity
Common stock
Retained earnings
NC Interests
Liabilities
Other Current and non-current liabilities
(included deferred tax liab.)
2,500
1,500
4,000
100
4,100
6,100
3,500
9,600
-1,690
7,910
The Journal Entries of the discussed step are shown in the box below:
20
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Debit
Beta equity (SE)
21
2,000
Patents (+A)
200
Goodwill (+A)
210
Investment in B (A)
Credit
2,100
100
NC interests (+SE)
210
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 4 SOLUTION B
The steps followed are the same as the ones in Solution A. The difference lies in how
we compute the goodwill: not only we include the one pertaining to the controlling
entity (i.e. 90%) but we also recognize the part (10%) which belongs to the minorities.
The consideration paid and the fair value of the non-controlling interests are then
allocated as follows:
a) BETAs Equity (100%)
2000
200
c)
(100)
d) Goodwill
Consideration paid + NC interests
300
2,400
Where:
a) is the equity of BETA (Common Stock + Retained earnings): 100% (1,500 + 500)
= 2,000;
b) is the difference between BETAs Patents fair and book values: 100% (400 200)
= 200;
c) is the deferred tax effect on the surplus of BETAs Patents: 50% (200) = 100;
d) is the Goodwill that justifies eventual difference between the firm value (i.e. the
sum of the consideration paid to acquire the stake in company BETA and the fair
value of the non-controlling interests) and what can be separately recognized among
BETAs assets and liabilities, net of the deferred tax effect: (2,100 + 300) {2,000 +
[200 (1 50%)]} = 2,400 2,100 = 300.
Moreover, we are already given the fair value of the non-controlling interests, which
amounts to 300.
The spreadsheet below shows the Step #4 for Alpha, on the date of acquisition:
22
Carlo Gallimberti
Antonio Marra
BALANCE SHEET
Alpha
Annalisa Prencipe
Beta
Aggregate
(1)
Consol.
300
300
2,100
-2,100
200
200
400
Non-current assets
Goodwill
Investments
2,100
Patents
200
Current assets:
Other assets
4,000
3,300
7,300
7,300
Total assets
6,100
3,500
9,600
-1,600
8,000
3,000
1,500
4,500
-1,500
3,000
600
500
1,100
-500
600
300
300
Owners equity
Common stock
Retained earnings
NC Interests
Liabilities
Other Current and non-current liabilities
(included deferred tax liab.)
2,500
1,500
4,000
100
4,100
6,100
3,500
9,600
-1,600
8,000
The Journal Entries of the discussed step are shown in the box below:
Debit
Beta equity (SE)
23
2,000
Patents (+A)
200
Goodwill (+A)
300
Investment in B (A)
Credit
2,100
100
NC interests (+SE)
300
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Lets us now consider the case of consolidation after the acquisition date. In this
case, it is highly likely that some intra-group transactions took place, so that other
than the elimination of the investment and the subsidiary equity we need also to
make sure we make all the required adjustments to the Aggregate results. Now we
also start looking at the consolidated income statement and we have to allocate the
non-controlling interests results, although we do that only in the last exercises. As a
matter of fact, to better isolate and learn the effects of the main intra-group
transactions, exercises 5 to 7 focus only on such adjustment, ignoring the very first
part of the consolidation process (step #4, to say the elimination of the parents
investment, the subsidiarys equity and the recognition of any surplus including
goodwill) which we would always need to perform otherwise. Starting from exercise
8, we will work with all the steps of the consolidation process.
24
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
INCOME STATEMENT
Alpha
Beta
Operating revenues
15,000
6,000
Operating expenses
9,000
3,000
Operating Income
6,000
3,000
-100
-80
5,900
2,920
Taxes
2,400
920
Net Income
3,500
2,000
BALANCE SHEET
Alpha
Beta
Non-current asset
Property, plant and equipment
10,000 10,000
Consolidation difference
Other intangible assets
1,000
Investments
11,000
1,000
3,000
7,500
Receivables
4,500
2,000
25
Aggregate
(1)
Consol.
Aggregate
(1)
Consol.
Carlo Gallimberti
Antonio Marra
3,000
Total assets
32,500 22,000
Annalisa Prencipe
1,500
20,000
9,600
Retained earnings
1,000
400
Net income
3,500
2,000
2,500
1,500
NC Interests
Common stock and Retained earnings
Net income
Non-current liabilities
Provisions
Deferred tax liabilities
200
Current liabilities
Trade and financial liabilities
Other liabilities
Total liabilities and equity
4,800
7,000
500
1,500
32,500 22,000
During the year X Alpha sold Beta 100 units of product Win at the unit price of 50.
For the purchase of the goods in question Alpha had beard a unit cost of 40. At
12.31.X, the reporting date, none of the units purchased by Beta has been sold to
third parties. Assume also that the goods have been paid cash by Alpha (i.e. there
are no intercompany receivable / payable accounts by the time of consolidation) and
that the tax burden for both companies is 50%.
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Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Proceed to the elimination of intercompany profits not realized with third parties,
included in the value of Betas inventories, in order to construct the consolidated
financial statements at 12.31.X.
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Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 5 SOLUTION
First, we need to prepare the Aggregate column of the financial statements, in
which we sum up, line by line, the amounts contained in the individual reports. As
always, since nothing is declared, we assume that the individual financial statements
are already uniform so that we can proceed straight to the consolidation
adjustments.
In this exercise, the adjustment required is related to the elimination of
intercompany profit included in the value of inventory. The counterparty of the
profit elimination is the reduction in the inventory value, which has been overestimated thanks to the intra-group mark up on the merchandize sold. Since all
inventories are still 100 per cent inside the group at the end of the year, we need to
reduce the value of the inventory in full. Since this adjustment reduces the operating
income result, this mean that the acquiring company accounted for too much taxes
due to the intra-company profit and therefore we need to lower the tax amount. The
counter-asset will be a deferred tax assets to be reported in the balance sheet.
The necessary computations are the following:
a) Decreasing revenues
5,000
b) Increasing costs
4,000
c)
5,000 (4,000)
1,000
1,000 50%
500
Net effect
500
1,000
1,000 50%
500
Total assets
500
500
500
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
INCOME STATEMENT
Alpha
Beta
Aggregate
(1)
Consolidated
Operating revenues
15,000
6,000
21,000
-5,000
16,000
Operating expenses
9,000
3,000
12,000
-4,000
8,000
Operating Income
6,000
3,000
9,000
-1,000
8,000
-100
-80
-180
5,900
2,920
8,820
-1,000
7,820
Taxes
2,400
920
3,320
-500
2,820
Net Income
3,500
2,000
5,500
-500
5,000
BALANCE SHEET
Alpha
Beta
Aggregate
(1)
Consolidated
-180
Non-current assets
Property, plant and equipment
10,000 10,000
20,000
20,000
1,000
2,000
2,000
Investments
11,000
11,000
11,000
Consolidation difference
1,000
500
500
-1,000
9,500
Current assets
Inventories
3,000
7,500
10,500
Receivables
4,500
2,000
6,500
6,500
3,000
1,500
4,500
4,500
Total assets
32,500 22,000
54,500
Common stock
20,000
9,600
29,600
29,600
Retained earnings
1,000
400
1,400
1,400
-500
54,000
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Carlo Gallimberti
Antonio Marra
Net income
Annalisa Prencipe
3,500
2,000
5,500
-500
5,000
2,500
1,500
4,000
4,000
200
200
NC Interests
Common stock and Retained
earnings
Net income
Non-current liabilities
Provisions
Deferred tax liabilities
200
Current liabilities
4,800
7,000
11,800
11,800
500
1,500
2,000
2,000
32,500 22,000
54,500
-500
54,000
The journal entries of the discussed step are shown in the box below:
INCOME STATEMENT
Debit
Net income
500
500
Credit
4,000
5,000
BALANCE SHEET
Debit
Deferred tax assets (+A)
500
500
Inventory (-A)
Credit
1,000
30
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Alpha
Beta
Operating revenues
15,000
6,000
Operating expenses
9,000
3,000
Operating Income
6,000
3,000
-100
-80
5,900
2,920
Taxes
2,400
920
Net Income
3,500
2,000
BALANCE SHEET
Alpha
Beta
10,000
10,000
1,000
1,000
Investments
11,000
Non-current assets
Property, plant and equipment
Consolidation difference
3,000
7,500
Receivables
5,000
2,000
2,500
1,500
Total assets
32,500
22,000
31
Aggreg.
(1)
(2)
Consol.
Aggreg.
(1)
(2)
Consol.
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Owners' equity
Common stock
20,000
9,600
Retained earnings
1,000
400
Net income
3,500
2,000
2,500
1,500
NC Interests
Common stock and Retained earnings
Net income
Non-current liabilities
Provisions
Deferred tax liabilities
200
Current liabilities
Trade and financial liabilities
Other liabilities
Total liabilities and equity
4,800
7,000
500
1,500
32,500
22,000
During the year X, Alpha sold to Beta 200 units of product Run at the unit price of
100. In order to purchase the goods ay hand, Alpha bearded a unit cost of 80. At
12.31.X, 40% of the units purchased by Beta has been sold to third parties. Assume
that there are no intercompany receivable / payable accounts at the time of
consolidation and that the tax burden for both companies is 50%.
Proceed to the elimination of intercompany profits not realized with third parties,
included in the value of Betas inventories, and construct the consolidated financial
statements at 12.31.X.
32
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 6 SOLUTION
As in the previous exercise, the adjustment we need to perform is related to the
elimination of the intercompany profit included in the value of inventory. The
difference is now that only 40% of the units has been sold to third parties, so that
60% are still inside the inventory of the acquiring company at the end of the year.
Again, as in the previous case, we need to account for the deferred tax effect related
to the adjustment, since we change the group income before taxes. For the sake of
clarity, we split the adjustments in two: #1. the one that pertains to the 60% of the
goods which are still within the group and that we will treat as in the previous case;
#2. The one that relates to the 40% of the good that have been sold to third parties
which do not impact the group profit.
The necessary computations are then the following:
First adjustment (60% of the goods)
a) Decreasing revenues
12,000
b) Increasing costs
9,600
12,000 (9,600)
2,400
2,400 50%
1,200
c)
Net effect
1,200
60% (100 80) 200
2,400
2,400 50%
1,200
Total assets
1,200
1,200
1,200
Net effect
8,000
6,400
1,600
0
0 50%
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Net Income
INCOME STATEMENT
Alpha
Beta
Aggreg.
(1)
(2)
Consol.
Operating revenues
15,000
6,000
21,000
-12,000
-8,000
1,000
Operating expenses
9,000
3,000
12,000
-9,600
-6,400
-1,600
-5,600
Operating Income
6,000
3,000
9,000
-2,400
6,600
-100
-80
-180
5,900
2,920
8,820
-2,400
6,420
Taxes
2,400
920
3,320
-1,200
2,120
Net Income
3,500
2,000
5,500
-1,200
4,300
BALANCE SHEET
Alpha
Beta
Aggreg.
(1)
(2)
Consol.
10,000
10,000
20,000
20,000
1,000
1,000
2,000
2,000
Investments
11,000
11,000
11,000
-180
Non-current assets
Property, plant and equipment
Consolidation difference
1,200
1,200
-2,400
8,100
Current assets
Inventories
3,000
7,500
10,500
Receivables
5,000
2,000
7,000
7,000
2,500
1,500
4,000
4,000
Total assets
32,500
22,000
54,500
-1,200
53,300
34
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Owners' equity
Common stock
20,000
9,600
29,600
29,600
Retained earnings
1,000
400
1,400
1,400
Net income
3,500
2,000
5,500
2,500
1,500
4,000
4,000
200
200
-1,200
4,300
NC Interests
Common stock and Retained
earnings
Net income
Non-current liabilities
Provisions
Deferred tax liabilities
200
Current liabilities
Trade and financial liabilities
Other liabilities
Total liabilities and equity
4,800
7,000
11,800
11,800
500
1,500
2,000
2,000
32,500
22,000
54,500
-1,200
The journal entries of the discussed step are shown in the box below:
INCOME STATEMENT
Debit
Operating revenues (-R)
12,000
8,000
Credit
1,200
9,600
8,000
Net income
1,200
BALANCE SHEET
Debit
Inventory (-A)
35
2,400
Credit
53,300
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
1,200
1,200
36
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
INCOME STATEMENT
Alpha
Beta
Operating revenues
10,000
6,000
1,600
Operating Expenses
4,400
Depreciation
(2)
Consol.
Aggreg.
(1)
(2)
Cosol.
400
7,200
2,600
Financial rev&exp
-100
-80
7,100
2,520
Taxes
3,000
720
Net Income
4,100
1,800
BALANCE SHEET
Alpha
Beta
8,200
13,600
1,000
1,000
Investments
11,000
Non-current assets
37
(1)
3,000
Operating Income
Inventories
Aggreg.
3,000
2,500
Carlo Gallimberti
Antonio Marra
Receivables
4,000
2,000
5,900
1,700
Total assets
33,100 20,800
Annalisa Prencipe
20,000
9,600
Retained earnings
1,000
400
Net income
4,100
1,800
2,500
1,500
NC Interests
C.S.& Retained earnings
Net income
Non-current liabilities
Provisions
Deferred tax liabilities
200
Current liabilities
Trade and Fin. liabilities
Other liabilities
Total liabilities and equity
4,800
6,000
500
1,500
33,100 20,800
At the beginning of year X Alpha sold to Beta, at the price of 4,000, a plant already
partially amortized and accounted for the following values:
Historical cost
6,000
Accumulated depreciation
3,600
2,400
At year end the plant is still recognized in the financial statements of Beta. The
parent Alpha used to depreciate the asset at an annual rate of 10% (on straight-line
38
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
basis); the subsidiary Beta depreciates the asset at an annual rate of 20% (on straightline basis).
Assume that the tax rate is 50%, and that the plant was paid in cash.
Proceed to the elimination of gains not realized with third parties, as well as to the
adjustment of depreciation of the asset sold by Alpha to Beta, in order to construct
the consolidated financial statement at 12.31.X.
39
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 7 SOLUTION
In this exercise, the adjustments required are related to the Elimination of
intercompany profit included in the value of long-lived assets.
When we deal with inter-company long lived assets sale, we always need to make
two adjustments:
1. Through the first adjustment we eliminate the gain recognized by the selling
company Alpha in its income statement. In the present case, the gain is of
1,600 (plant selling price 4,000 net carrying amount 2,400]. The counteraccount is the reduction of the assets value on the balance sheet for the same
amount. Remember that, since we are changing income statement s account,
we need to consider the fiscal impact of the sell.
a) Decreasing revenues
b1) Tax effect
(4,000 2,400)
1,600
1,600 50%
800
Net Income
c)
800
(4,000 2,400)
1,600
1,600 50%
800
Total assets
800
800
800
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
200
200 50%
100
100
200
200 50%
100
100
INCOME STATEMENT
Alpha
Beta
Aggregate
Operating revenues
10,000
6,000
16,000
1,600
Operating Expenses
4,400
Depreciation
1,600
3,000
7,400
400
400
(1)
(2)
Consol.
16,000
-1,600
0
7,400
-200
200
8,400
Operating Income
7,200
2,600
9,800
-100
-80
-180
7,100
2,520
9,620
-1,600
200
8,220
Taxes
3,000
720
3,720
-800
100
3,020
Net Income
4,100
1,800
5,900
-800
100
5,200
41
-1,600
-200
-180
Carlo Gallimberti
BALANCE SHEET
Antonio Marra
Annalisa Prencipe
Alpha
Beta
Aggregate
(1)
(2)
Consol.
8,200
13,600
21,800
-1,600
200
20,400
1,000
1,000
2,000
2,000
Investments
11,000
11,000
11,000
Non-current assets
800
-100
700
Current assets
Inventories
3,000
2,500
5,500
5,500
Receivables
4,000
2,000
6,000
6,000
5,900
1,700
7,600
7,600
Total assets
33,100 20,800
53,900
Common stock
20,000
9,600
29,600
29,600
Retained earnings
1,000
400
1,400
1,400
Net income
4,100
1,800
5,900
2,500
1,500
4,000
4,000
200
200
800
100
53,200
Owners' equity
-800
100
5,200
NC Interests
C.S.& Retained earnings
Net income
Non-current liabilities
Provisions
Deferred tax liabilities
200
Current liabilities
Trade and Fin. liabilities
Other liabilities
Total liabilities and equity
4,800
6,000
10,800
10,800
500
1,500
2,000
2,000
33,100 20,800
53,900
-800
100
53,200
42
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
INCOME STATEMENT
Debit
Deferred tax assets (+A)
800
1,600
PPE (-A)
Credit
1,600
800
BALANCE SHEET
Debit
43
100
PPE(+A)
200
Credit
200
100
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Fair Value
Plants
6,000
7,000
TOTAL
6,000
7,000
The expected residual useful life of the buildings is 10 years. The difference between
the cost of the investment and the fair value of the subsidiarys owners equity is
assigned to goodwill. Consider that the company recognizes the goodwill only for
the share acquired by the parent company and that, on the date of the consolidation,
there is no impairment loss on goodwill.
During the accounting period X, the two companies carried out the following intragroup transactions:
A. ALPHA sells BETA services for a total amount of 300; at the end of the
accounting period such transaction has not been paid yet;
B. ALPHA lends money to BETA; the total amount lent is 1,000 and this will be
paid back all together in 10 years. In relation to this transaction, the two
companies recorded interests for 100, and these have been already paid at the
end of the current accounting period;
44
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
C. BETA sells goods to ALPHA for a total amount of 600. All goods are still in
ALPHAs inventory. The intra-group profit included in such goods is 250, i.e.
the cost of goods sold for BETA is 350. The transaction has already been paid
at the end of the accounting period.
D. ALPHA sells a building to BETA. The carrying amount of the building sold
was 500 [historical cost = 900]. The sell price, collected cash, is 800. ALPHA
applied a yearly depreciation rate of 10%, while BETA applies 20%.
E. The tax rate for the two companies is 50%.
Prepare the consolidated financial statements of the group ALPHA BETA on Dec. 31,
X.
45
Carlo Gallimberti
INCOME STATEMENT
Operating revenues
Operating expenses
Operating income
Financial revenues
Financial expenses
Earnings before taxes
Income tax expense
Net income
NC share of Income
BALANCE SHEET
Non-current assets
Property, plant and equipment
Goodwill
Investments
Financial receivables
Deferred tax assets
Current assets
Inventories
Trade receivables
Total assets
Owners equity
Common stock
Retained earnings
Net income
NC Interests
NC Common stock and reserves
NC Net income
Non-current liabilities
Financial payables
Deferred tax liabilities
Current liabilities
Total liabilities and equity
Antonio Marra
Alpha
Annalisa Prencipe
150,000
141,000
9,000
2,000
4,000
7,000
1,200
5,800
130,000
121,000
9,000
6,500
10,000
5,500
3,000
2,500
Beta
Aggr.
280,000
262,000
18,000
8,500
14,000
12,500
4,200
8,300
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Consol.
Alpha
Beta
Aggr.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Consol.
29,000
6,000
35,000
5,000
10,000
1,000
2,800
6,000
12,800
2,600
5,000
51,600
4,000
2,000
15,800
6,600
7,000
67,400
17,000
13,500
5,800
3,000
2,400
2,500
20,000
15,900
8,300
2,300
900
3,200
13,000
51,600
7,000
15,800
20,000
67,400
46
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 8 SOLUTION
Assuming that the individual financial statements are uniform, the first thing to do
is to compute the Aggregate column as the plain sum, line by line, of each item in
the individual financial statement. Then, we need to break down the price paid for
the acquisition in all its determinants to proceed according to step #4a. As usual, this
is our starting point. We present now each of the adjustment, as they appear
numerated in the financial statements columns.
Adjustment # (1)
In the exercise at hand, the purchase price can be broken down as follows:
a) BETAs Equity (80% 5,400)
4,320
800
c)
400
d) Goodwill
280
Consideration paid
5,000
Where:
a) is the equity of BETA [80% (Common Stock + Retained earnings)]: 80% (3,000
+ 2,400) = 5,400;
b) is the difference between BETAs plants fair value and their book values: 7,000
6,000 = 1,000;
c) is the deferred tax effect on BETAs plants, computed as the marginal tax rate
(50%) and the surplus of point b) (600): 50% 1,000 = 500
d) is the Goodwill that justifies eventual difference between the consideration that is
paid to acquire company BETA and what can be separately recognized among the
BETAs assets, net of the deferred tax effect:
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Adjustment # (2)
Recognition of depreciation of surplus on buildings [10% 1000 = 100], since the
expected residual life of the building is 10 years. This adjustment requires the
recognition of the deferred tax effect, since the groups income is affected.
Specifically, the income before taxes decreases by 100, therefore taxes have to be
reduced by 50 [100 50%].
Adjustment # (3)
Elimination of intra-group service revenues [300] and expenses [300] and related
payables/receivables.
Adjustment # (4)
Elimination of intra-group note payable / receivable [1,000].
Elimination of the related interests [Financial revenues / expenses 100].
Adjustment # (5)
Elimination of intra-group revenues and expenses related to the sale of goods.
Decreasing revenues [600], decreasing costs [350]: net effect [600 350 = 250].
This adjustment requires the recognition of the deferred tax effect, affecting the
groups income. Precisely, the income before taxes decreases by 250. Therefore,
considering the tax rate, for the accrual principle, taxes have to be reduced by 125
(250 50%). This reduction in taxes has to be reported on the balance sheet
recording a credit as deferred tax asset.
Moreover, this adjustment requires reducing the value of ending inventory by the
intercompany profit amount in full, since all inventories are 100 per cent still on
48
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
hand in the acquiring company at the end of the year. Therefore, inventories are
equal to 6,350 [6,600 250].
Adjustment # (6)
With this adjustment we eliminate the effects of the intra-group sale of the plant,
eliminating the gain recognized by Alpha in its income statement for the value of 300
[800 (sales price) 500 (Net book value)].
Moreover, this adjustment requires a decrease in the depreciation of plants in order
to return it to the pre-sale value. In fact if we go back to the pre-sale situation, Alpha
was recognizing depreciation for 90 [10% of his historical cost equal to 900] while
Beta has recognized a cost for 160 [price paid = historical cost = 800 20%].
Therefore, depreciation needs to be adjusted and decreased by 70 [160 90].
This adjustment requires also the recognition of the deferred tax effect, affecting the
groups income. Precisely, the income before taxes decreases by 230 [300 70].
Therefore, taxes have to be reduced by 115 [230 50%]. This reduction in taxes has
to be reported in the balance sheet as deferred tax asset.
Adjustment # (7)
We finally record the share of profit belonging to non-controlling interests. We do
that by starting from the subsidiarys net income and adding only those adjustments
that have an impact on the subsidiarys profit, which in part pertain to the noncontrolling interests. NC interests net income is calculated as follows: (2,500 50
125) 20% = 465.
49
Carlo Gallimberti
INCOME STATEMENT
Operating revenues
Operating expenses
Operating income
Financial revenues
Financial expenses
Earnings before taxes
Income tax expense
Net income
NC share of Income
BALANCE SHEET
Non-current assets
Property, plant and equipment
Goodwill
Investments
Financial receivables
Deferred tax assets
Current assets
Inventories
Trade receivables
Total assets
Owners equity
Common stock
Retained earnings
Net income
NC Interests
NC Common stock and reserves
NC Net income
Non-current liabilities
Financial payables
Deferred tax liabilities
Current liabilities
Total liabilities and equity
Antonio Marra
Alpha
Beta
150,000
141,000
9,000
2,000
4,000
7,000
1,200
5,800
130,000
121,000
9,000
6,500
10,000
5,500
3,000
2,500
Aggr.
280,000
262,000
18,000
8,500
14,000
12,500
4,200
8,300
(1)
(2)
100
-100
Alpha
Beta
29,000
Annalisa Prencipe
(3)
-300
-300
0
(4)
(5)
-600
-350
-250
(6)
-300
-70
-230
-230
-115
-115
(6)
-100
-50
-50
-100
-100
0
-250
-125
-125
Aggr.
(1)
(2)
(3)
(4)
(5)
6,000
35,000
-100
5,000
10,000
1,000
2,800
6,000
12,800
1,000
280
-5,000
2,600
5,000
51,600
4,000
2,000
15,800
6,600
7,000
67,400
17,000
13,500
5,800
3,000
2,400
2,500
20,000
15,900
8,300
2,300
900
3,200
13,000
51,600
7,000
15,800
20,000
67,400
-3,720
-3,000
-2,400
1,180
-300
-300
-50
-3,720
-100
-465
+465
(7)
(8)
+125
-1,000
-125
-125
+115
-115
6,350
6,700
62,040
-465
17,000
13,500
7,545
+465
1,180
465
2,200
450
19,700
62,040
-115
-1,000
-300
-300
-1,000
-125
Consol.
278,800
261,380
17,420
8,400
13,900
11,920
3,910
7,545
465
Consol.
35,670
280
1,000
11,800
240
-250
-50
500
(8)
-230
-1,000
-100
(7)
-115
50
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Debit
Operating revenues (-R)
1,200
100
PPE (+A)
670
Goodwill (+A)
280
240
1,000
Equity (-SE)
6,155
Credit
Operating expenses(-E)
620
100
290
Investment (-A)
5000
1,000
Inventories (-A)
250
300
450
NC interests (+SE)
1,655
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Fair Value
Property
7,000
9,000
Land
1,000
3,000
TOTAL
8,000
12,000
Useful life of property is expected to be 20 years, while that of patents 10 years. The
remaining positive consolidation difference is allocated to goodwill. Assume that at
the date of consolidation the recoverable amount of goodwill exceeds its carrying
amount.
In order to compute the deferred tax effects on surplus, consider a tax rate of 50%.
Moreover, during the year X the following intercompany operations took place:
A. Beta sold goods to Alpha at the price of 4,000 and makes a profit, thanks to
this sale, for 2,000. At year end the 70% of goods has been sold to third
parties;
B. The parent Alpha purchased from third parties goods which are subsequently
sold to the subsidiary Beta at the price of 5,000. For the purchase of the goods
in question Alpha had beard cost of 4,000. The entire consignment is still in
the warehouse of Beta at the end of accounting period;
C. On January, 1 Beta sold to Alpha a plant which was purchased at the price of
8,000 and depreciated for 2,000. The selling price was 7,000. Beta was going to
Understanding and Preparing IFRS Consolidated Financial Statements
52
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Carlo Gallimberti
Antonio Marra
INCOME STATEMENT
Operating revenues
Alpha
10,000
Beta
6,000
Aggregate
16,000
Operating expenses
5,000
3,000
8,000
Operating income
Financial revenues and expenses
Income before taxes
Taxes
Net income
NC share of income
BALANCE SHEET
Non-current assets
Property, plant and equipment
Goodwill
Other intangible assets
Investments
Deferred tax assets
Current assets
Inventories
Receivables
Cash & other assets
Total assets
Owners' equity
Common stock
Retained earnings
Net income
NC share of equity
Common stock and retained earnings
Net income
Non-current liabilities
Provisions
Deferred tax liabilities
Current liabilities
Trade and financial liabilities
Other liabilities
Total liabilities and equity
5,000
-100
4,900
1,900
3,000
3,000
-80
2,920
920
2,000
8,000
-180
7,820
2,820
5,000
Alpha
Beta
Aggregate
10,000
10,000
20,000
1,000
11,000
1,000
2,000
11,000
3,000
4,000
3,000
32,000
2,500
2,000
1,500
17,000
5,500
6,000
4,500
49,000
20,000
1,000
3,000
9,600
400
2,000
29,600
1,400
5,000
2,500
200
1,500
4,000
200
4,800
500
32,000
2,000
1,500
17,000
6,800
2,000
49,000
Annalisa Prencipe
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Consolidated
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Consolidated
54
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 9 SOLUTION
Adjustment # (1)
Elision of the investment of Alpha [11,000] against the equity of the subsidiary at the date
of the acquisition [9,600 + 400 = 10,000] (excluding the net income of year X, realized after
the acquisition).
Recognition of the surplus value on property [2,000] and other intangible assets (patents)
[2,000].
Recognition of deferred tax assets on surplus value [4,000 50% = 2,000].
Recognition of positive difference of consolidation (goodwill) = 1,400 11,000 (cost of
investment) 80% [10,000 (beta equity) + 4,000 (gross surplus on property and patents)
2,000 (surplus tax effect)].
Recognition of non-controlling interests 2,400 20% [10,000 (beta equity) + 4,000 (gross
surplus on property and patents) 2,000 (surplus tax effect)].
Adjustment # (2)
Recognition of depreciation of surplus on property of 100 [5% 2,000], since the expected
residual life of the building is 20 years.
Recognition of depreciation of surplus on patents of 200 [10% 2,000] since the expected
life of the patent is 10 years.
This adjustment requires the recognition of the deferred tax effect, since it affects the
groups income, which decreases by 300. Taxes have then to be reduced by 150 [300 50%]
and deferred tax liabilities in the balance sheet are reduced by the same amount.
As far as goodwill is concerned, we need to compare its book value with the recoverable
amount: since the recoverable amount is higher than the book value, there are no writedowns of goodwill.
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Adjustment # (3)
Decreasing revenues [30% 4,000 = 1,200]; increasing costs [30% 2,000 = 600]: net impact
[-1,200 ( 600) = 600]. This adjustment requires the recognition of the deferred tax effect
since it affects the groups income. Therefore, considering the tax rate, taxes have to be
reduced by 300 [600 50%] and recognized in the balance sheet accordingly.
Moreover, this adjustment requires reducing the value of ending inventory. Since 30% of
goods are still at hand of the acquiring company at the end of the year, inventories have to
been decrease by 600.
Adjustment # (4)
Decreasing revenues [70% 4,000 = 2,800]; increasing costs [(70% 2,000) + 70% (4,000
2,000) = 1,400 + 1,400 = 1,800]: net impact [-8,000 (-6,400 1,600) = 0].
Adjustment # (5)
Decreasing revenues [100% 5,000 = 5,000]; increasing costs [100% 4,000 = 4,000]: net
impact [-5,000 (-4,000) = -1,000]. This adjustment requires the recognition of the deferred
tax effect, affecting the groups income. Precisely, the income before taxes decreases by
1,000. Therefore, considering the tax rate, for the accrual principle, taxes have to be
reduced by 500 [1,000 50%]. This reduction in taxes has to be reported on the balance
sheet recording a credit as deferred tax asset. Moreover, this adjustment requires reducing
the value of ending inventory by the intercompany profit. Since all the goods of this
transaction are still at hand of the acquiring company at the end of the year, inventories
have to be reduced by 1,000.
Adjustment # (6)
This adjustment eliminates the gain recognized by Beta on the sale of the plant. The net
book value of the asset, in fact, is 6,000. It has been sold at 7,000. We have to reduce the
value of the asset on the balance sheet and eliminate the gain in the income statement;
then we have to increase the depreciation of the year for 300 (the difference between the
depreciation of Alpha and Beta). The net impact is a decrease of the income before taxes by
Understanding and Preparing IFRS Consolidated Financial Statements
56
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
1,300, which determine less taxes of 650 [1,300 50%] and deferred tax assets for the same
amount.
Adjustment # (7)
This adjustment allocates part [20%] of the subsidiarys profit to non-controlling interests,
both on the income statement (Non-controlling interests NC interests share of Income)
and on the balance sheet (within the NC share of equity). Non-controlling interests,
however, should be applied to the net income of Beta [2,000] after all the consolidation
adjustments affecting it (2), (3), and (6). The 20% of non-controlling interests should be
computed as 20% 900 [20% (2,000 150 300 650)] and equal 180. Until this last
adjustment, the groups profit is entirely attributed to the parent company; therefore, in
order to allocate the non-controlling interests share of income we deduct the amount of
180 from the parent company profit and show it in the NC share of income. The net
income of the parent company passes from 3,400 to 3,220; the net income of noncontrolling interests from 0 to 180.
Carlo Gallimberti
Antonio Marra
INCOME STATEMENT
Operating revenues
Alpha
10,000
Beta
6,000
Aggregate
16,000
Operating expenses
5,000
3,000
8,000
Operating income
Financial revenues and expenses
Income before taxes
Taxes
Net income
NC share of income
BALANCE SHEET
Non-current assets
Property, plant and equipment
Goodwill
Other intangible assets
Investments
Deferred tax assets
Current assets
Inventories
Receivables
Cash & other assets
Total assets
Owners' equity
Common stock
Retained earnings
Net income
NC share of equity
NC Common stock and retained
NC Net income
Non-current liabilities
Provisions
Deferred tax liabilities
Current liabilities
Trade and financial liabilities
Other liabilities
Total liabilities and equity
5,000
-100
4,900
1,900
3,000
3,000
-80
2,920
920
2,000
8,000
-180
7,820
2,820
5,000
Alpha
Beta
10,000
(1)
Annalisa Prencipe
(2)
(3)
1,200
300
-600
-300
-600
0
0
-300
-150
-150
Aggregate
(1)
(2)
10,000
20,000
-100
1,000
11,000
1,000
2,000
11,000
2,000
1,400
2,000
-11,000
3,000
4,000
3,000
32,000
2,500
2,000
1,500
17,000
5,500
6,000
4,500
49,000
20,000
1,000
3,000
9,600
400
2,000
29,600
1,400
5,000
-5,600
-9,600
-400
(4)
-2,800
-1,400
-1,400
0
(5)
-5,000
(6)
-1,000
-4,000
300
-1,000
-1,300
-600
-300
-300
-1,300
-650
-650
-1,000
-500
-500
(3)
(4)
(5)
(6)
1,500
4,000
200
4,800
500
32,000
2,000
1,500
17,000
6,800
2,000
49,000
2,000
-5,600
1,200
-180
180
(7)
-300
-150
500
-600
-1,000
-300
-300
-500
-500
4,800
-180
4,620
1,220
3,220
180
Consolidated
20,600
1,400
3,800
650
1,450
-650
3,900
6,000
4,500
41,650
-180
20,000
1,000
3,220
180
2,400
180
-200
300
Consolidated
6,000
-1,300
-650
2,400
2,500
200
(7)
-150
4,000
2,050
-300
6,800
2,000
41,650
-300
-500
-650
58
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Debit
Operating revenues (-R)
PPE (+A)
Credit
10,000
600
Goodwill (+A)
1,400
1,800
1,450
Equity (-SE)
11,780
Operating expenses (-E)
6,800
1,600
Investment (-A)
11,000
Inventories (-A)
1,600
1,850
NC interests (+SE)
2,580
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Fair Value
10,000
11,000
6,000
Provisions
1,500
2,500
Total
11,500
19,500
Property
Brand
60
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
B. The parent Alpha grants funding to Beta for 3,000, which are to be entirely repaid
(and indeed were) at year end together with interests recognized among financial
expenses and revenues, respectively, for 200;
C. Beta sells Alpha a plant not yet depreciated and accounted for at a net carrying
amount of 5,000. The selling price is 6,000. Alpha depreciates the asset at a rate of
10% (the same that Beta would have used if had not sold the plant). The related
invoice is paid at year end.
Any deferred tax assets and liabilities are accounted for on the basis of a tax rate of 50%.
The fair value of the minorities at the acquisition date was 5,500.
Proceed to the preparation of the consolidated financial statement as at 12.31.X under the
full goodwill method.
Carlo Gallimberti
Antonio Marra
INCOME STATEMENT
Operating revenues
Other operating revenues
Operating expenses
Depreciation and write-offs
Operating income
Alpha
16,000
600
7,000
2,800
4,200
9,000
600
6,400
Beta
8,000
1,000
4,200
4,800
Aggr.
24,000
1,000
13,200
600
11,200
-1280
3,520
1720
1,800
1320
12,520
6,520
6,000
(0)
Annalisa Prencipe
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Consol.
62
Carlo Gallimberti
BALANCE SHEET
Non-current assets
Property, plant and equipment
Goodwill
Other intangible assets
Investments
Deferred tax assets
Current assets
Inventories
Receivables
Cash & other assets
Total assets
Owners' equity
Common stock
Retained earnings
Net income
NC share of equity
Antonio Marra
Alpha
Beta
Aggr.
15,400
10,000
25,400
1,000
10,000
500
1,500
10,000
3,000
6,000
2,800
38,200
6,800
1,000
2,500
20,800
9,800
7,000
5,300
59,000
20,000
1,000
4,200
6,000
1,000
1,800
26,000
2,000
6,000
2,500
1,500
4,000
200
8,800
1,500
38,200
200
7,000
3,500
20,800
15,800
5,000
59,000
(0)
Annalisa Prencipe
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Consol.
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 10 SOLUTION
As in the previous exercises, to which we address the reader for more detailed
explanations on the initial steps, we start from the Aggregate situation and assume
that financial statements are uniform so that we can proceed to eliminate the
investment against Betas equity (step #4a). We then proceed to the intra-group
adjustments as usual and finally, after the allocation of the non-controlling interests
results, we compute the consolidated financial statements.
When we start step #4a, we should however notice that the equity value at the time
of the acquisition (8,000) is different from what is indicated in the individual
financial statement (6,000 + 1,000 = 7,000) and then we have to take this difference
into consideration. Differences in the acquired entitys equity are likely to happen in
practice, since each firm is a going concern entity. To correctly prepare the
consolidated financial statement we then need to understand what happen to Betas
equity and see whether this had an intra-group effect which we should neutralize.
Since nothing is specified in the exercise text, we need to make a reasonable
assumption. Since Betas registered positive results both this year and especially the
years before this, we can see that the reduction was not due to accumulated losses.
Then, given that there are no other items in Betas equity, it is safe to assume that
some dividends have been distributed. This is compatible with the financial
revenues and expenses item in the income statement.
We then need to make the following:
- in computing Betas goodwill we need to consider the value of Betas equity at
the acquisition date (i.e. 8,000) since the consideration paid referred to the
situation in which Beta operated at that time;
- among our consolidation adjustments, since part of the dividends distributed
(i.e. Alphas part) did not exit the group, we need to write off 50% of the
dividend distributed.
64
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Adjustment # (0)
Dividends received by Beta: 1,000 50% = 500
Dividends received by non-controlling Betas shareholders = 1,000 x (1 50%) = 500.
As usual, we suppose there is no fiscal impact on dividends for simplicity.
Debit
Financial revenues (R, SE)
Retained earnings (+SE)
500
500
Credit
500
500
Adjustment # (1)
Elimination of investment [10,000] and subsidiary equity [8,000], excluding the net
income of year X, realized after acquisition.
Recognition of surplus value [1,000] on PPE.
Recognition of surplus value [6,000] on other intangible assets (brand).
Recognition of minus value [1,000] on provisions.
Recognition of deferred tax assets on minus vale [1,000 50% = 500].
Recognition of deferred tax liabilities on surplus value [7,000 50% = 3,500]
Recognition of non-controlling interests for 5,500 (already given)
Recognition of goodwill = 4,500 10,000 (cost of investment) + 5,500 (noncontrolling interests) [8,000 (Betas equity) + 7,000 (gross surplus on PPE and
brand) 3,500 (surplus tax effect) 1,000 (minus value on provision) + 500 (minus
value tax effect)].
Adjustment # (2)
This correction ensures the recognition of the depreciation of surplus values
previously not recognized, considering the (deferred) tax effect.
Recognition of depreciation of surplus on property of 100 [10% 1,000], since the
depreciation rate for the building is 10%.
65 Understanding and Preparing IFRS Consolidated Financial Statements
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
66
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Adjustment # (6)
This adjustment eliminates the gain of 1,000 recognized by Beta on the sale of the
plant. The net book value of the asset, in fact, is 5,000; it has been sold at 6,000. We
have to reduce the value of the asset on the balance sheet and eliminate the gain in
the income statement; then we have to decrease the depreciation of the year by 100
(the depreciation of higher value recognized by Beta). The net impact is a decrease of
the income before taxes by 900, which determine less taxes (deferred taxes) of 450
[900 50%] and deferred tax assets for the same amount.
Adjustment # (7)
This adjustment allocate part [50%] of the subsidiarys profit to non-controlling
interests, both on the income statement (Non-controlling interests NC interests
share of Income) and on the balance sheet (within the NC share of equity). We only
consider the net income of Beta [1,800] and all the consolidation adjustments
affecting it: adjustment #(2), #(6). The 50% of non-controlling interests should be
computed on 50% (1,800 200 450) and it is 575.
Carlo Gallimberti
INCOME STATEMENT
Operating revenues
Other operating revenues
Operating expenses
Depreciation and write-offs
Operating income
Financial revenues and expenses
Income before taxes
Taxes
Net income
NC share of income
Alpha
16,000
Antonio Marra
(0)
4,800
Aggr.
24,000
1,000
13,200
600
11,200
600
-1280
1320
-500
7,000
2,800
4,200
3,520
1720
1,800
12,520
6,520
6,000
-500
0
-500
9,000
600
6,400
Beta
8,000
1,000
4,200
(1)
0
0
0
Annalisa Prencipe
(2)
(3)
-960
(4)
-4800
400
-960
-3200
-400
-1,600
-400
-200
-200
0
0
0
-1,600
-800
-800
(5)
(6)
(7)
-1000
-100
0
+200
-200
-900
0
0
0
-900
-450
-450
Consol.
18,240
0
9,340
600
8,300
820
0
0
-575
575
9,120
5,070
3,475
575
68
Carlo Gallimberti
BALANCE SHEET
Non-current assets
Property, plant and equipment
Goodwill
Other intangible assets
Investments
Deferred tax assets
Current assets
Inventories
Receivables
Cash & other assets
Total assets
Owners' equity
Common stock
Antonio Marra
Alpha
Beta
Aggr.
15,400
10,000
25,400
1,000
10,000
500
1,500
10,000
(0)
3,000
6,000
2,800
38,200
6,800
1,000
2,500
20,800
9,800
7,000
5,300
59,000
20,000
6,000
26,000
Retained earnings
1,000
1,000
2,000
+500
+500
Net income
NC share of equity
NC Common stock and retained earnings
NC Net income
Non-current liabilities
Provisions
Deferred tax liabilities
Current liabilities
Trade and financial liabilities
Other liabilities
Total liabilities and equity
4,200
1,800
6,000
-500
1,500
8,800
1,500
38,200
7,000
3,500
20,800
4,000
200
15,800
5,000
59,000
(1)
(2)
1,000
4,500
6,000
-10,000
500
-100
(3)
(4)
(5)
(6)
(7)
-900
450
-450
8,200
7,000
5,300
59,350
-300
800
2,000
-800
-6,000
20,000
-2,000
0
-200
-800
-450
-575
3,475
575
5,000
575
5,500
1,000
3,500
-400
Consol.
25,400
4,500
7,200
0
1,750
-1,600
-500
2,500
200
Annalisa Prencipe
2,000
-200
5,000
3,500
-400
15,800
5,000
59,350
-800
-450
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
The journal entries (other than the ones seen with respect to the intra-group dividends) are
then:
Debit
Property, plant and equipment (+A)
1,000
Goodwill (+A)
4,500
6,000
500
8,000
200
960
400
4,800
800
200
Credit
1,000
450
575
5,500
Investments (-A)
10,000
Provisions (+L)
1,000
3,500
PPE (-A)
100
300
200
960
3,200
800
Inventories (-A)
1,600
200
100
450
PPE (-A)
900
70
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
575
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
72
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 11 SOLUTION
In order to properly apply the equity method, we need first to allocate the acquisition cost
to its different components.
ALLOCATION OF THE ACQUISITION COST
Net book value of INVESTEEs equity
20% 180
36
Unrecorded brands
20% 20 (1 0.5)
Undervalued property
20% 30 (1 0.5)
Goodwill
19
TOTAL COST
60
Credit
60
Cash(-A)
60
When dividends are collected, INVESTOR will make the following entry
Debit
Cash (+A)
Credit
At the end of the period, INVESTOR will calculate the adjusted income from the
investment.
ADJUSTED INCOME
Net income
20% 20
3 /10
(0.3)
Depreciation on property
Adjusted income
3.7
To record the adjusted income, INVESTOR will make the following entry:
Debit
Investment in INVESTEE (+A)
73 Understanding and Preparing IFRS Consolidated Financial Statements
3.7
Credit
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
3.7
At the end of the period, the carrying amount of the investment in INVESTEE will be 60.7
million (=60-3+3.7)
74
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 12 SOLUTION
In order to properly apply the equity method, we need first to allocate the acquisition cost
to its different components.
ALLOCATION OF THE ACQUISITION COST
Net book value of DAUGHTERs equity
40% 900
360
Undervalued PPE
40% 50 (1 0.5)
10
Undervalued provisions
40% 20 (1 0.5)
(4)
Goodwill
54
TOTAL COST
420
Credit
420
Cash(-A)
420
When DAUGTHER records the revaluation surplus, MOTHER will adjust its investment
as follows:
Debit
Investment in DAUGTHER (+A)
Credit
At the end of the period, MOTHER will calculate the adjusted income from its investment
in DAUGTHER.
ADJUSTED INCOME
Net income
40% 50
20
10 / 5
(2)
Depreciation on property
Unrealized gain
(3.6)
Adjusted income
14.4
18
76
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
18 (1 0.5)
40% 9
3.6
To record the adjusted income, MOTHER will make the following entry:
Debit
Investment in DAUGTHER (+A)
Income from investment equity method (+R)
Credit
14.4
14.4
At the end of the period, the carrying amount of the investment in DAUGTHER will be
438.4 million (=420+4+14.4)
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
78
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
EXERCISE 13 SOLUTION
As usual, to apply the equity method, we first need to allocate the acquisition cost to its
different components.
ALLOCATION OF THE ACQUISITION COST
Net book value of MOONs equity
25% 600
150
Undervalued patent
12.5
Undervalued inventory
25% 16 (1 0.5)
Goodwill
15.5
TOTAL COST
180
Credit
180
Cash(-A)
180
When MOON distributes dividends, SKY will adjust its investment as follows:
Debit
Cash (+A)
Credit
7.5
7.5
At the end of the period, SKY will calculate the adjusted income from its investment in
MOON.
ADJUSTED INCOME
Net income
25% 32
Depreciation on patent
12.5 / 10
(1.25)
Reversal of inventory
Unrealized gain on building
Adjusted income
(2)
(0.45)
4.3
Carlo Gallimberti
Antonio Marra
Annalisa Prencipe
(10 6)
0.4
(4 0.4)
3.6
3.6 (1 0.5)
1.8
25% 1.8
0.45
The surplus on inventory is reversed once the inventory is sold. The reason for this
adjustment is that whatever profit MOON has realized on such inventory the real
profit from the point of view of SKY will be 2 million lower, as the cost of that inventory
borne by SKY was originally 2 million higher than what recorded by MOON in its books.
To record the adjusted income, SKY will make the following entry:
Debit
Investment in MOON (+A)
Income from investment equity method (+R)
Credit
4.3
4.3
At the end of the period, the carrying amount of the investment in MOON will be 176.8
million (=180-7.5+4.3)
80