ACCA paper f 7 financial reporting F7FR session23 d08

SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME OVERVIEW Objective To explain the accounting treatment of subsidiaries in consolidated statement of comprehensive income INTRODUCTION INTER-COMPANY TRANSACTIONS AND UNREALISED PROFIT Dividends Inter-company items ENTITLEMENT OF NON-CONTROLLING INTEREST Income generation Control and ownership MID-YEAR ACQUISITIONS Inclusion of subsidiary’s results Dividends from subsidiary acquired mid-year Basics TREATMENT OF GOODWILL CONSOLIDATED STATEMENT OF CHANGES IN EQUITY IAS 2301 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME INTRODUCTION 1.1 Income generation The statement of comprehensive income shows the income generated by resources (= net assets in the statement of financial position): Parent’s own statement of comprehensive income includes dividend income from subsidiary The consolidated statement of comprehensive income shows the income generated by the group’s resources (= net assets in consolidated statement of financial position) The consolidated statement of comprehensive income is prepared on a basis consistent with that used in the preparation of the consolidated statement of financial position 1.2 Control and ownership Consolidated statement of comprehensive income Revenue [Parent + Subsidiary (100%) – intercompany items] ↓ Profit after tax (CONTROL) OWNERSHIP Equity shareholders of the parent Non-controlling interests ( % × subsidiary’s profit after tax) Profit for the period $ X ↓ _ X _ X X _ X _ This reflects the profit or loss section of the statement of comprehensive income, any other gains or losses for the period will be included within other comprehensive income This session will focus upon the profit or loss component of the statement of comprehensive income The profit or loss shows the income generated from net assets under parent’s control In the profit or loss dividends from subsidiary are replaced by parent’s share of subsidiary’s income and expenses (100%) line-by-line, as far as profit after tax Reflect ownership by identifying non-controlling interests’ share of subsidiary’s profit after tax of the group profit after tax in profit or loss, leaving profit attributable to parent’s shareholders Eliminate effects of transactions between group members (single entity concept) 2302 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Commentary For example, for interest paid by subsidiary to parent, cancel interest payable in subsidiary’s profit or loss against interest receivable in parent’s profit or loss INTER-COMPANY TRANSACTIONS AND UNREALISED PROFIT 2.1 Dividends Dividends from subsidiary to parent are inter-company items: Cancel parent’s dividend income from subsidiary against subsidiary’s dividends paid and proposed This “leaves” the non-controlling interests’ share of subsidiary’s dividends Non-controlling interest in subsidiary in profit or loss is calculated on profit after tax (before dividends), and therefore includes the non-controlling interest’s share of subsidiary’s dividends and retained profits Commentary In short, simply ignore dividends from subsidiary on consolidation In profit or loss dividend income is from trade investments only Any dividends paid or proposed will be dealt with in the statement of changes in equity 2.2 Inter-company items 2.2.1 Trading Inter-company trading will be included in the revenue of one group company and the purchases of another Such inter company items must be cancelled out on consolidation (single entity concept) by taking the following steps: add across parent and subsidiary revenue and cost of sales; deduct value of inter-company sales from revenue and cost of sales Commentary This adjustment has no effect on profit and hence will have no effect on the noncontrolling interest share of profit 2.2.2 Unrealised profits on trading If any items sold by one group company to another are included in inventories (i.e have not been sold on outside the group by the year end), their value must be adjusted to the lower of cost and net realisable value to group (as for consolidated statement of financial position) 2303 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME The adjustment will be made as a consolidation adjustment against the profits of the selling company Steps to set up the provision for unrealised profit Calculate the amount of inventory remaining at the year end Calculate the inter-company profit included in it Make a provision against the inventory to reduce it to cost to the group (or net realisable value if lower) Example Whales owns 75% of Porpoise The trading account for each company for the year ended 31 March 2008 is as follows: Revenue Cost of sales Gross profit Whales $ 120,000 (80,000) _ Porpoise $ 70,000 (50,000) _ 40,000 _ 20,000 _ During the year Porpoise made sales to Whales amounting to $30,000 $15,000 of these sales were in inventory at the year end Profit made on the year end inventory items amounted to $2,000 Required: Calculate group revenue, cost of sales and gross profit Solution Seller adjustment Revenue Cost of sales – per question – unrealised profit Gross profit Non-controlling interest 2304 Whales $ Porpoise Adjustment Consolidated $ $ $ _ _ _ _ _ _ _ _ _ SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2.2.3 Unrealised profit in opening inventory Last years closing inventory will become this years opening inventory, and so any adjustments made in the previous year in terms of the unrealised profit will be reversed in the current year, on the presumption that the inventory has been sold on in the current period Therefore any unrealised profit in the opening inventory will be deducted from the costs of the original selling company, thereby increasing the profits for the current year All we are doing with unrealised profit is shifting the period in which the profit is recognised, delaying the recognition of the profit by the group until the goods have been sold outside of the group This adjustment only ever impacts on the gross profit calculation, never the statement of financial position 2.2.4 Non-current asset transfers The consolidated statement of comprehensive income should include depreciation of non-current assets based on cost to group and should exclude profit/loss on noncurrent asset transfers between group members This is consistent with treatment in the consolidated statement of financial position Eliminate profit or loss on transfer and adjust depreciation in full (control) These adjustments are made in full against the consolidated figures Illustration Parent owns 80% of subsidiary Parent transferred a non-current asset to subsidiary on January 2007 at a value of $15,000 The asset originally cost Parent $2012,000 and depreciation to the date of transfer was $8,0004,800 The asset had a useful life of years when originally acquired, with a residual value of zero The useful life at the date of transfer remains at years.Both companies depreciate their assets at 20% per annum on cost, making a A full year’s depreciation charge is made in the year of acquisition and none in the year of disposal Total depreciation for 2007 was $700,000 for parent and $500,000 for subsidiary Required: Show the adjustments required for the above transaction in the consolidated statement of comprehensive income for the year ended 31 December 2007 2305 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Solution Per question Asset unrealised profit [15,000 – (20,000 – 8,000)] Depreciation adjustment (15,000 / years) – 4,000 Parent $ 700,000 Subsidiary Adjustment Consolidated $ $ 500,000 1,200,000 3,000 3,000 (1,000) (1,000) _ 1,202,,000 _ ↑ This would be part of the profit after tax of subsidiary and would therefore be shared with the non-controlling interest ENTITLEMENT OF THE NON-CONTROLLING INTEREST 3.1 Basics The non-controlling interests’ share of subsidiary’s profit after tax must be shown, leaving group profit remaining Example Pathfinder owns 75% of Sultan Statements of comprehensive income for the two companies for the year ending 30 September 2008 are as follows: Pathfinder $ 100,000 (60,000) _ Sultan $ 50,000 (30,000) _ Gross profit Expenses 40,000 (20,000) _ 20,000 (10,000) _ Profit for the period 20,000 _ 10,000 _ Revenue Cost of sales During the year, Pathfinder sold goods to Sultan for $20,000, at a gross profit margin of 40% Half of the goods remained in inventory at the year-end Required: Prepare the consolidated statement of comprehensive income of the group for the year ended 30 September 2008 2306 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Proforma solution Consolidated statement of comprehensive income for the year ended 30 September 2008 $ Revenue Cost of sales _ Gross profit Expenses _ Profit _ Non-controlling interests (W3) Equity shareholders of the parent (balance) Profit for the period _ _ WORKINGS (1) Group structure Pathfinder 75% Sultan (2) Consolidation schedule Pathfinder Revenue Cost of sales Sultan $ AdjustmentConsolidated $ $ Expenses _ Profit (3) $ _ Non-controlling interests $ _ 2307 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (4) Unrealised profit Selling price Cost Gross profit % $ _ _ MID-YEAR ACQUISITIONS 4.1 Inclusion of subsidiary’s results $ _ Group accounts only include subsidiary from date of acquisition, i.e when control is gained If subsidiary is acquired mid-year: Consolidate subsidiary from date of acquisition; Identify net assets at date of acquisition for goodwill (see consolidated statement of financial position notes); Assume revenue and expenses accrue evenly over the year (unless contrary is indicated) Therefore time-apportion totals for revenue and costs, then deduct inter-company items Example Parent acquired 75% of subsidiary on April 2007 Extracts from the companies’ statements of comprehensive income for the year ended 31 December 2007 are: Revenue Cost of sales Gross profit Parent $ 100,000 (70,000) _ Subsidiary $ 75,000 (60,000) _ 30,000 _ 15,000 _ Since acquisition, parent has made sales to subsidiary of $15,000 None of these goods remain in inventories at the year end Required: Calculate revenue, cost of sales and gross profit for the group for the year ending 31 December 2007 2308 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Solution Consolidated statement of comprehensive income for the year ending 31 December 2007 9/ 12 Parent Subsidiary Adjustment Consolidated $ $ $ $ Revenue Cost of sales Gross profit 4.2 _ _ _ _ _ _ _ _ Dividends from subsidiary acquired mid-year In calculating net assets at acquisition, assume profit after tax (i.e before dividends) accrues evenly over year, unless contrary is indicated TREATMENT OF GOODWILL IFRS rules that goodwill arising on acquisition must be capitalised and tested annually for impairment Any fall in value is recognised as an expense and charged to profit or loss in the period Any excess of the fair value of the assets and liabilities acquired over the cost of the acquisition is credited to profit or loss immediately CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 6.1 IAS IAS requires a statement of changes in equity to be included in a set of financial statements, whether they are from a single entity perspective or that of a group The statement will reconcile how the equity position has changed during the period The consolidated statement will look at the movements from the point of the group, only changes in the parents share capital position will be included in the consolidated statement The statement may include some of the following: Opening balances Cumulative effect of changes in accounting policy and prior period errors Profit for the year Ordinary dividends (parent plus non-controlling interest share of subsidiary) Issue of shares Equity component of convertible bond Deferred tax implications (if any) to above items 2309 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Example The draft accounts of two companies at 31 March 2008 were as follows: Statement of financial position Investment in Jemima at cost Sundry assets Hamble Group Jemima $ $ 3,440 – 36,450 6,500 _ _ Share capital ($1 ordinary shares) Retained earnings Statement of comprehensive income Profit before tax Tax 39,890 _ 6,500 _ 20,000 19,890 _ 3,000 3,500 _ 39,890 _ 6,500 _ Hamble Group Jemima $ $ 12,950 3,800 (5,400) (2,150) _ _ Profit after tax Retained earnings b/d 7,550 12,340 _ 1,650 1,850 _ Retained earnings c/f 19,890 _ 3,500 _ Hamble and Jemima are both incorporated enterprises Hamble had acquired 90% of Jemima, on April 2006, when the reserves of Jemima were $700 Goodwill of $110 arose on the acquisition An impairment loss of $20 was recognised in the previous years accounts, and an impairment loss of $25 is to be recognised in the current years accounts Required: Prepare extracts from the Hamble Group statement of financial position, statement of comprehensive income, and statement of changes in equity 2310 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Solution (1) Consolidated retained earnings April 2007 $ Hamble Group Jemima Less Goodwill _ _ (2) Consolidated retained earnings 31 March 2008 $ Hamble Group Jemima Less Goodwill _ _ Consolidated statement of financial position as at 31 March 2008 $ Goodwill Sundry assets _ _ Share capital Retained earnings Non-controlling interest _ _ Consolidated statement of comprehensive income for the year ended 31 March 2008 Profit before taxation Goodwill Taxation Profit after taxation Non-controlling interests Equity shareholders of the parent Profit for the financial year Hamble $ Jemima $ _ _ Consolidated $ _ _ _ _ 2311 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Consolidated statement of changes in equity for year ended 31 March 2008 At April 2007 Profit for year At 31 March 2008 Share capital $ Retained earnings $ Total ——— ——— ——— ——— ——— ——— ——— ——— ——— ——— $ Non-controlling interest $ Total Equity $ FOCUS You should now be able to: account for the effects of intra-group trading; prepare a consolidated statement of comprehensive income for a simple group, dealing with an acquisition in the period and non-controlling interest; account for the effects of intra-group trading and other transactions including: unrealised profits in inventory and non-current assets; intra-group loans and interest and other intra-group charges; and intra-group dividends; prepare a consolidated statement of changes in equity 2312 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME EXAMPLE SOLUTIONS Solution Seller adjustment Whales $ 120,000 (80,000) Revenue Cost of sales – per question – unrealised profit Gross profit _ Porpoise Adjustment Consolidated $ $ $ 70,000 (30,000) 160,000 (50,000) 30,000 (2,000) (102,000) _ _ _ 40,000 _ 18,000 _ Non-controlling interest (25% × 18,000) _ 58,000 _ (4,500) _ Solution Consolidated statement of comprehensive income for the year ended 30 September 2008 Revenue Cost of sales $ 130,000 (74,000) _ Gross profit Expenses 56,000 (30,000) _ Profit Non-controlling interests (W3) 26,000 (2,500) _ Profit for the period 23,500 _ WORKINGS (a) (1) Group structure Pathfinder 75% Sultan 2313 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (2) Consolidation schedule Pathfinder $ 100,000 Revenue Sultan Adjustment Consolidated $ $ $ 50,000 (20,000) 130,000 Cost of sales – per question (60,000) – unrealised profit (W4) (30,000) (4,000) Expenses (10,000) (20,000) 20,000 (74,000) (30,000) _ Profit (3) 26,000 _ Non-controlling interests $ 2,500 _ Sultan 10,000 (W2) × 25% = (4) Unrealised profit Selling price Cost % $ 100 20,000 (60) (12,000) Gross profit 40 $ 8,000 ì ẵ = 4,000 _ Solution Consolidated statement of comprehensive income for the year ending 31 December 2007 9/ 12 Parent Subsidiary Adjustment Consolidated $ $ $ $ Revenue Cost of sales 100,000 56,250 (15,000) 141,250 (70,000) (45,000) 15,000 (100,000) _ _ _ _ Gross profit 30,000 11,250 – 41,250 _ _ _ _ Solution (1) Consolidated retained earnings April 2007 $ Hamble Group Jemima 90% (1,850 – 700) Less Goodwill 12,340 1,035 (20) _ 13,355 _ 2314 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (2) Consolidated retained earnings 31 March 2008 $ Hamble Group Jemima 90% (3,500 – 700) Less Goodwill (20 + 25) 19,890 2,520 (45) _ 22,365 _ Consolidated statement of financial position as at 31 March 2008 Goodwill (110 – 45) Sundry assets (36,450 + 6,500) $ 65 42,950 _ 43,015 _ Share capital Retained earnings Non-controlling interest (6,500 × 10%) 20,000 22,365 650 _ 43,015 _ Consolidated statement of comprehensive income for the year ended 31 March 2008 Profit before taxation Goodwill Taxation Profit after taxation Hamble $ 12,950 Jemima $ 3,800 (5,400) _ (2,150) _ 7,550 1,650 Consolidated $ 16,750 (25) (7,550) _ 9,175 _ Non-controlling interests (1,650 × 10%) Equity shareholders of the parent 165 9,010 _ Profit for the financial year 9,175 _ Consolidated statement of changes in equity for year ended 31 March 2008 At April 2007 Profit for year At 31 March 2008 Share capital $ 20,000 ——— 20,000 ——— Retained earnings $ 13,353 9,013 ——— 22,366 ——— Total $ 33,353 9,013 ——— 42,366 ——— Non-controlling Total interest Equity $ $ 485 33,838 165 9,178 ——— ——— 650 43,016 ——— ——— 2315 SESSION 23 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Commentary Opening non-controlling interests is calculated as 10% of the share capital and the retained earnings at April 2007 (3,000 + 1,850) 2316 ... non-controlling interests’ share of subsidiary’s profit after tax of the group profit after tax in profit or loss, leaving profit attributable to parent’s shareholders Eliminate effects of transactions between... interests’ share of subsidiary’s profit after tax must be shown, leaving group profit remaining Example Pathfinder owns 75 % of Sultan Statements of comprehensive income for the two companies for the year... 75 % of subsidiary on April 20 07 Extracts from the companies’ statements of comprehensive income for the year ended 31 December 20 07 are: Revenue Cost of sales Gross profit Parent $ 100,000 (70 ,000)