basic group accounts

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Consolidated Accounts (Group Accounts)

These notes are for those studying financial accounting and reporting at an introductory level.

All initial examples will include the preparation of Consolidated Balance Sheets of the holding company (parent)plus a subsidiary or subsidiaries. A simple group Income Statement will also be prepared. The ‘acquisition’

method of consolidation will be used.

As far as the balance sheet is concerned we will examine:

i) The cancellation processes that are required for the acquisition method of consolidation including inter-

company trading.

ii) Part cancellation, where the holding company may buy the `goodwill` of the subsidiary, where less

than 100% of the subsidiary voting shares have been acquired, which raises the issue of the non-controlling (minority interest) shareholders.

Rationale for Group Accounting

There are many reasons why one company (a parent undertaking) might wish to acquire control of another (a

subsidiary undertaking). These might include commercial objectives such as to gain access to market share,to curtail competition, to acquire new products or services, acquire new resources such as fixed assets,

research and development assets, to acquire the services of skilled staff, to gain access to finance, for

taxation reasons or to diversify risk. There have, though, been notable examples of `asset stripping`

whereby an acquired company is subsequently dismantled and its assets sold.

An acquisition strategy can represent a speedier means of achieving expansion than traditional `internaldevelopment` methods. This can often be `cost-effective` - particularly where a parent undertaking has

sufficient ̀ strength` within its balance sheet to effect a purchase of a subsidiary undertaking by issuing its own

new shares to the subsidiary’s shareholders as a form of consideration



new shares to the subsidiary s shareholders as a form of consideration

Content of Group accounts

It is important to understand that group accounts are a combination of the accounts of all those entities withinthe group. The individual units are separate legal entities, but the group has no separate legal existence - it

exists for accounting purposes. There is no obligation of a parent undertaking, for example, for the solvency orotherwise of a subsidiary, unless specific guarantees are given to that effect.

In the UK, the Companies Acts require group accounts to be prepared where a company is a parentundertaking at the end of its financial year and where it is not itself a wholly owned subsidiary undertaking of

another UK incorporated company. The preparation of the group accounts is also governed by International

Accounting Standards, particularly:

IAS 1 Presentation of Financial Statement

IFRS 3 Business Combinations

IAS 27 Consolidation and Separate Financial Statements

IAS 28 Investments in Associates, and

IAS 31 Interests in joint ventures.

It is not necessary for you, at this stage, to understand the full requirements of all the regulatory framework.

The detailed regulations change from t ime to time as IFRSs and IASs are updated, but for the time being it is

sufficient to be aware of the following:

IAS 27 sets out the various definitions for Parent, Subsidiary and Control. It indicates that when preparing groupaccounts, where possible the same accounting dates should be used. It is also important that commonaccounting policies (as per all IFRSs and IASs) are applied for all parties to the consolidation. Intra-group

transactions are eliminated from the process.

IFRS 3, which has recently (2008) been revised, is a major standard to consider when preparing group

accounts. It is vital that all transactions are recorded at fair value (which is the amount by which an asset or

liability is valued by knowledgeable willing parties in an arm’s length transaction) A recent innovation herehas



3

Basic Consolidated Accounting Procedures

Case 1: It is 31 March 19X4 and Hold plc has just acquired 100% of the Ordinary Shares of Sub Ltd for £70,000. On the date of the acquisition the net assets of Sub Ltd

were £70,000 and the accounts of the two companies were as follows: You should also assume that the current assets of Hold Ltd include £14,000 due from Sub Ltd andthat the Current Liabilities of Sub Ltd include £14,000 owing to Hold Ltd. The consolidated (group) position is as follows;

Balance Sheets of Hold plc and its Subsidiary as at 31 March 19X4

Hold plc Sub Ltd Group Note

£000 £000 £000 £000 £000 £000

Fixed Assets 100 50 150 1

Investment in Sub Ltd at cost 70* 2170 50

Current Assets 90 50 126 3

Current Liabilities (100) (20) (106) 4

Net current assets \ (liabilities) (10) 30 20

160 80 170

Long Term Loans (20) (10) (30) 5

Net Assets £140 £70 £140

Ordinary Share Capital 100 50* 100 6

Retained Profits 40 20* 40 7

Shareholders Capital Employed £140 £70 £140

* Note that in this example the Investment by Hold in Sub exactly equals the book value of Sub’s shares and reserves at acquisition. The first rule of group accounts is that,on consolidation, equal and opposites, (marked * above) are cancelled out. Other balance sheet items are combined but the inter-company balances, are removed from

the Consolidated Balance Sheet. Note also that you will never see the information in the above format in group accounts. The cases are presented in this manner

for learning purposes only.

Notes: Notes Continued:

1 £100 + £50 = £150 6 Hold only (always the case). Shares of Sub, £50, are cancelled out

2 Cancelled out, £0 7 Hold only (in this case). Reserves of Sub, as existed at acquisition date, £20, are cancelled out.3 £90 + £50 - £14 = £126

4 £100 + £20 - £14 = £106

5 £20 + £10 = £30



4

Case 2: It is 31 March 19X4 and Hold plc has just acquired 100% of the Ordinary Shares of Sub Ltd for £85,000. On the date of the acquisition the accounts of the two

companies and the consolidated position were as follows.Balance Sheets of Hold plc and its Subsidiary as at 31 March 19X4

Hold plc Sub Ltd Group

£000 £000 £000 £000 £000 £000

Fixed Assets 100 50 150 Investment in Sub at cost 85*

185 50Goodwill on acquisition 15

Current Assets 90 50 140

Current Liabilities (100) (20) (120)


175 80 185

Long Term Loans (20) (10) (30)

Net Assets £155 £70 £155

Financed By:

Ordinary Share Capital 100 50* 100

Retained Profits 55 20* 55


* Note that in this example the Investment by Hold in Sub is £15 larger than the book value of Sub’s shares and reserves (net assets) at acquisition. This means that Holdhas paid £15,000 more than the fair value of the net assets of Sub Ltd. It has purchased ‘Goodwill’. This is known as ‘Goodwill on acquisition’. Note that in this case thereare no inter-company debtors and creditors. It is normal for businesses to write off (amortise) the goodwill acquired over a number of years. For the time being, though, wewill continue to carry goodwill in consolidated balance sheets at its original acquisition value.



5

Case 3: It is 31 March 19X4 and Hold plc has just acquired 100% of the Ordinary Shares of Sub Ltd for £60. On the date of the acquisition the accounts of the two

companies and the consolidated position were as follows. All amounts are in £000:

Balance Sheets of Hold plc and its Subsidiary as at 31 March 19X4

Hold plc Sub Ltd Group Note

£000 £000 £000 £000 £000 £000 Fixed Assets 100 50 150

Investment in Sub at cost 60* .160 50 150



Net current assets 15 30 45

175 80 195


Net Assets £155 £70 £165

Financed By:

Ordinary Share Capital 100 50* 100 Retained Profits 55 20* 65 1


* Note that in this example the Investment by Hold in Sub is £10 smaller than the book value of Sub’s shares and reserves at acquisition. This creates negative goodwillarising on consolidation. Note again that in this case there are no inter-company debtors and creditors.

Note:1. The treatment of negative goodwill is tricky, but it cannot be shown as a ‘negative asset’. Instead the £10 has to berecognised in the group retained profits.

£55 + £10 = £65



6

Case 4: Let us now assume that Hold had paid £85 for 60% of the Shares and reserves (net assets) of Sub Ltd instead of 100%. On the date of the acquisition the

accounts of the two companies and the consolidated position were as follows. All amounts are in £000:

Balance Sheets of Hold plc and its Subsidiary as at 31 March 19X4Hold plc Sub Ltd Group

£000 £000 £000 £000 £000 £000

Fixed Assets 100 50 150Investment in Sub at cost 85*

185 50Goodwill on acquisition 43




175 80 213


Net Assets £155 £70 £183

Financed By:

Ordinary Share Capital 100 50* 100 Retained Profits 55 20* 55

Non-Controlling Interests of Sub Ltd 28


* Note that in this example the Investment by Hold in Sub is £43 larger than the book value of Sub’s shares and reserves at acquisition. This is because the £85investment now purchases (60% x £70 = £42) of Sub’s shares and reserves (or net assets). The remaining 40% of the shares and reserves of Sub Ltd belong to theNon- Controlling Interest (Minority Interest) Shareholders of Sub Ltd. At Balance Sheet date, the Non-Controlling (Minority) Interests in Sub Ltd are shown in the

Consolidated Balance Sheet as (40% x £70 = £28). When calculation the non-controlling interest you should always start with the latest balance sheet figures for

the Shares and Reserves of each subsidiary. You then apply the ‘non-group shareholding percentage to this figure. The above presentation indicates that £28,000

of the subsidiary’s net assets are financed by outside (non group) shareholders, that is, Non-Controlling Interest Shareholders.

Now attempt the following simple case:



7

Case 5: Draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9

H plc S Ltd£000 £000 £000 £000

Fixed assets 18 100Investment by H in S 100

Current Assets 20 30Current Liabilities (10) (20)Net current assets 10 10

128 110Long Term Loans (28) (10)

£100 £100

Ordinary Share Capital £1 Shares 80 50Profit and Loss Reserve 20 50

£100 £100

H acquired 80% of S Ltd’s net assets when S’s shares stood at £50 and its profit and loss reserve at £50. Amounts are in £000's

Any positive Goodwill is carried in the balance sheet, negative goodwill is transferred to the group profit and loss reserves.

Required: Prepare the group balance sheet as at 31 December 20X9

Use the pro-forma overleaf:



8

Consolidated balance sheet of H plc and its subsidiary S Ltd as at 31 December 20X9

H plc S Ltd Group Note

£000 £000 £000 £000 £000 £000 £000

Fixed assets 18 100

Investment by H in S 100Goodwill on acquisitionCurrent Assets 20 30Current Liabilities (10) (20)Net current assets 10 10


£100 £100


£100 £100

Non-Controlling Interests



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£000 £000 £000 £000 £000 £000

Fixed assets 18 100 118 1Investment by H in S 100Goodwill on acquisition 20 2


Current Liabilities (10) (20) (30) 4


128 110 158


£100 £100 £120

Ordinary Share Capital £1 Shares 80 50 80 6

Profit and Loss Reserve 20 50 20 7

£100 £100 100 Non-Controlling Interests 20 8

£120

Notes

1 H + S = £18 + £100 = £118

2 £100 paid to acquire 80% x (£50 + £50) = £100 paid to acquire £80 = £20 Goodwill

3 H + S = £20 + £30 = £50

4 H + S = £10 + £20 = £30

5 H + S = £28 + £10 = £38

6 H only, £80

7 H + 100% of S post acquisition = £20 + £0 = £20

8 20% x £100 = £20



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We will now consider what happens in the consolidation process where the subsidiary increases its profit and loss reserve in the period beyond acquisition date by the

Parent. Consider the following example.


H plc S Ltd

£000 £000 £000 £000Fixed assets 18 100Investment by H in S 100Current Assets 20 30Current Liabilities (10) (20)Net current assets 10 10


£100 £100

80 50Profit and Loss Reserve 20 50*

£100 £100

H acquired 80% of S Ltd’s net assets for £100,000 some time ago when S’s shares stood at £50,000 and its profit and loss reserve at £40,000

Any positive Goodwill is carried in the balance sheet, negative goodwill is transferred to the group profit and loss reserves.


NB in this case the profit and loss reserve at acquisition date was £40. By consolidation date this has increased to £50*

The impact of this small change to the case requires care with:

the goodwill calculation and

a revised treatment for the consolidated reserves in the balance sheet.



11

Goodwill Calculation £000

In this case, H has paid 100

For 80% of (£50 + £40) = 80% x £90 = 72Goodwill on acquisition £28

Consolidated Reserves

The rule to apply for group reserves is that the consolidated figure includes all H’s reserves plus H’s share of any reserves of S Ltd which have been earned SINCE

acquisition. That means that the slightly more complete rule for calculating consolidated reserves is:

Holding Company (H), plus H’s share of Subsidiary post acquisition profits.

Post acquisition profits

As indicated above, these are the profits earned by S since acquisition. The quickest way to establish post acquisition profits of S is to locate the very latest profit and lossreserve figure at consolidation date (latest balance sheet) and then deduct the profit and loss reserve which existed at acquisition date. The technical term for the profit and

loss reserve which exists at acquisition date is pre-acquisition profits.

In the above example, post acquisition profits are £50 – £40 = £10.

H’s share of S’s post acquisition profits is 80% x £10 = £8



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£000 £000 £000 £000 £000 £000

Fixed assets 18 100 118 1

Investment by H in S 100Goodwill on acquisition 28 2

Current Assets 20 30 50 3Current Liabilities (10) (20) (30) 4


128 110 166


£100 £100 £128



£100 £100 108

Non-Controlling Interests 20 8

£128

Notes

1 H + S = £18 + £100 = £118

2 £100 paid to acquire 80% x (£50 + £40) = £100 paid to acquire £72 = £28 Goodwill

3 H + S = £20 + £30 = £50

4 H + S = £10 + £20 = £30

5 H + S = £28 + £10 = £38

6 H only, £80

7 H + 80% of S post acquisition = £20 + 80% x (£50 - £40) = £20 + £8 = £28

8 20% x £100 = £20

Now consider another case.



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H plc S Ltd

£000 £000 £000 £000

Fixed assets 267 200Investment by H in S 51Current Assets 120 140Current Liabilities (90) (60)


Long Term Loans (48) (180)£300 £100

Ordinary Share Capital £1 Shares 180 50Profit and Loss Reserve 120 50*

£300 £100

H acquired 60% of S Ltd’s net assets for £51,000 one year ago when S’s shares stood at £50,000 and its profit and loss reserve at £10,000

The current assets of H include £35,000 owing from S and the current liabilities of S include £35,000 owing to H.

Any positive Goodwill ar ising on consolidation is amortised over its useful life, in this case considered to be f ive years. Negative goodwill, if any, is transferred to group profitand loss reserves.


NB In this case you will find that Goodwill on acquisition calculates at £15,000. Amortising (writing off) over 5 years means an annual goodwill amortisation amount of

£3,000. The impact of this transaction on group accounts would be to reduce the balance sheet figure for goodwill from £15,000 to £12,000 and also group reserves will

be reduced by £3,000 to reflect the amortisation of goodwill which would have been charged as an expense in the income statement.



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Draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9

H plc S Ltd Group

£000 £000 £000 £000 £000 £000 Note


Investment by H in S 51

Goodwill on Consolidation 12 2

318 479 Current Assets 120 140 225 3

Current Liabilities 90 60 115 4

30 80 110

348 280 589

Long Term Loans 48 180 228 5

300 100 361




300 100 361

Notes:

1 H + S = £267 + £200 = £467

2 For an acquisition costing 51H acquired 60% of S, 60% x £60 = 36Goodwill acquired 15 amortised over 5 years = £3 per annumAmortised for 1 year 3Carrying value in Group balance sheet £12

3 H + S – Inter-Company = £120 + £140 - £35 = £225

4 H + S – Inter-Company = £90 + £60 - £35 = £115

5 H + S = £48 + £180 = £228 6 H only £180

7 H + 60% x post acquisition profit of S minus 1 year’s amortization = £120 + (60% x (£50 - £10) - £3 = £120 + £24 - £3 = £141

8 40% x Shareholders funds of S = 40% x £100 = £40



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Now consider a very small change to the case 7 scenario. Acquisition of S by H is now TWO years ago.


H plc S Ltd

£000 £000 £000 £000



348 280Long Term Loans (48) (180)

£300 £100


£300 £100

H acquired 60% of S Ltd’s net assets for £51,000 two years ago when S’s shares stood at £50,000 and its profit and loss reserve at £10,000


Any positive Goodwill arising on consolidation is amortised over its useful life, in this case considered to be five years. Negative goodwill, if any, is transferred to group profitand loss reserves.


NB As with case 7 you will find that Goodwill on acquisition calculates at £15,000. Amortising (writing off) over 5 years means an annual goodwill amortisation amount of

£3,000. But acquisition was two years ago which means that the group accounts will have reflected two years of amortisation of goodwill. The impact of this transaction on

group accounts would be to reduce the balance sheet figure for goodwill from £15,000 to £9,000 and also group reserves will be reduced by £6,000 to reflect the

amortisation of goodwill which would have been charged as an expense in the income statement for two years.



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H plc S Ltd Group

£000 £000 £000 £000 £000 £000 Note




318 476 Current Assets 120 140 225 3


30 80 110

348 280 586


300 100 358




300 100 358

Notes:

3 H + S = £267 + £200 = £467

4 For an acquisition costing 51H acquired 60% of S, 60% x £60 = 36Goodwill acquired 15 amortised over 5 years = £3 per annumAmortised for 2 years 6Carrying value in Group balance sheet £9

3 H + S – Inter-Company = £120 + £140 - £35 = £225

4 H + S – Inter-Company = £90 + £60 - £35 = £115

5 H + S = £48 + £180 = £228 6 H only £180

7 H + 60% x post acquisition profit of S minus 2 year’s amortization = £120 + (60% x (£50 - £10) - £6 = £120 + £24 - £6 = £138




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Finally please attempt the final balance sheet case (number 9) for yourselves:


H plc S Ltd

£000 £000 £000 £000



348 280Long Term Loans (48) (180)

£300 £100


£300 £100



Any positive Goodwill arising on consolidation is amortised over its useful life, in this case considered to be ten years. Negative goodwill, if any, is transferred to group profitand loss reserves.




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H plc S Ltd Group

£000 £000 £000 £000 £000 £000 Note




318 471



30 80 110

348 280 581


300 100 353




300 100 353

Notes:

5 H + S = £263 + £200 = £463


3 H + S – Inter-Company = £120 + £140 - £26 = £234

4 H + S – Inter-Company = £90 + £60 - £26 = £124

5 H + S = £48 + £180 = £228

6 H only £180 7 H + 75% x post acquisition profit of S minus 2 year’s amortisation =

£120 + (75% x (£50 - £10) - £2 = £120 + £30 - £2 = £148




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The Consolidated Income Statement

In this section we need to be aware of some transaction which might well happen between companies within a group. At this basic level we will consider just two items:

Inter-company sales \ purchases Dividends

Inter-company (IC) Sales and Purchases

Where the Holding Company Sells to the Subsidiary (or vice versa) the transaction might (or might not) be done at a ‘profit’ to the selling company. For group Income

Statement purposes inter-company sales and purchases are ignored for purposes of group sales and group purchases. Remember if S sells goods worth £10 then H buys

goods worth £10.

If, however, any stocks are in hand at the end of the year which emanate from inter-company transactions, then if there is any profit within those stocks then the profit

would have to be eliminated from group stock figures. Such transactions will not feature in these notes.

Any outstanding amounts at the year end in respect of inter-company debtors and creditors are dealt with in the balance sheet as you have already seen.

Dividends

As we have already seen the Holding Company is entitled to its share of any dividends paid by the Subsidiary companies. When it comes to dealing with dividends receivedwithin the group income statement we must only incorporate dividends received from outside the group. Hence the dividend received by H from S is not included in the

group accounts.

In terms of Dividends payable, the rule to adopt is that we include Dividends paid by the parent only.

Other Items within the Group Income Statement:

There will be an extra operating cost in respect of the amortisation of goodwill in subsidiaries. There is also the matter of profit attributable to Non-controlling (Minority)

Interests.

Non-Controlling (Minority) Interests

These stakeholders are entitled to the non-group percentage of profits after taxation of each subsidiary. So if the Parent holds 80% of the subsidiary shares and theSubsidiary earns £45,000 after tax, then the Non-controlling shareholders are entitled to 20% x £45,000 = £9,000 of the after-tax profit. This is shown as a deductionfrom

group profit after tax.



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Consolidation Rules

At a basic level there are a small number of rules which, if applied consistently will enable you to produce a simple consolidated income statement.

Item Consolidation treatment

Sales H + S minus any inter-company (IC) sales. Assume that there are no stocks from inter-company sales at the year end.

Cost of Sales H + S minus any inter-company (IC) purchases

Operat ing expenses H + SAmortisation of goodwill in Subsidiary As calculated for annual amortisat ion undertaken in group balance sheet

Financing Costs H + S

Taxation H + S

Inter-company dividend received by H Ignore

Non-Controlling Interest (Minority Interest) Profit after tax of Subsidiary x non-group shareholding percentage. This is deducted from the group income statement.

Ordinary Dividend paid H only

Retained Profit Brought Forward H + H’s share of S Post-acquisition retained profit brought forward, minus goodwill amortised to date

Retained Profit Carried Forward H + H’s share of S Post-acquisition retained profit carried forward, minus goodwill amortised to date

Please Note:

These transactions will be calculated using the internally produced accounts. You will not necessarily see all these figures in the published group accounts.

The information from case 9, above, has been supplemented to provide individual income statement accounts for H and S for the year to 31 December 20X9



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Case 9 continued. The following are the draft Income Statements for H plc and S Ltd for the year ended 31 December 20X9

H plc S Ltd

£000 £000 £000 £000

Sales 350 230

Cost of Sales 210 138

Gross Profit 140 92

Operating Expenses 35 23Amortisation of goodwill in S Ltd

Operating profit 105 69

Financing Costs 5 22

Profit before Tax 100 47

Taxation 20 7

Profit after Tax 80 40

Inter Company Dividends received 3

83

Non Controlling Interests

Group profit for year

Dividends paid 9 4

Retained profit for year 74 36

Retained profit brought forward 46 14

Retained profit carried forward 120 50



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As before, the draft balance sheets of H plc and its subsidiary S Ltd as at 31 December 20X9 are

H plc S Ltd

£000 £000 £000 £000

Fixed assets 263 200Investment by H in S 55Current Assets 120 140Current Liabilities (90) (60)


Long Term Loans (48) (180)£300 £100


£300 £100


Inter-company (IC) sales from S Ltd to H plc during the year were £150,000. There were no unsold stocks in relation to these transactions at the year end.The current assets of S include £26,000 owing from H and the current liabilities of H include £26,000 owing to S.

Any positive Goodwill arising on consolidation is amortised over its useful life, in this case considered to be ten years. Negative goodwill, if any, is transferred to group profitand loss reserves.

Required: Prepare the group Income statement for the year ended 31 December 20X9 and a Group balance sheet as at that date.



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Solution: Group Income Statement for H plc and S Ltd for year ended 31 December 20X9

H plc S Ltd Group

£000 £000 £000 £000 £000 £000 Note

Sales 350 230 430 1

Cost of Sales 210 138 198 2

Gross Profit 140 92 232

Operating Expenses 35 23 58 3Amortisation of goodwill in S Ltd 1 59 4

Operating profit 105 69 173

Financing Costs 5 22 27 5

Profit before Tax 100 47 146

Taxation 20 7 27 6

Profit after Tax 80 40 119

Inter Company Dividends received 3 7

83

Non Controlling Interests 10 8

Group profit for year 109

Dividends paid 9 4 9 9

Retained profit for year 74 36 100

Retained profit brought forward 46 14 48 10

Retained profit carried forward 120 50 148 11



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Group Balance Sheet of H plc and S Ltd as at 31 December 20X9

H plc S Ltd Group

£000 £000 £000 £000 £000 £000 Note




318 471 Current Assets 120 140 234 14


30 80 110

348 280 581


300 100 353




300 100 353

Notes: £000

1 H + S – IC = £350 + £230 - £150 = £430

2 H + S – IC =£210 + £138 - £150 = £198

3 H + S = £35 + £23 = £58

4 For an acquisition costing 55

H acquired 75% of S, 75% x £60 = 45Goodwill acquired £10

Amortised over 10 years = £1

5 H + S = £5 + £22 = £27



25

£000

6 H + S = £20 + £7 = £27

7 From outside group only = £0

8 25% x £40 = £10

9 H plc only £9

10 H 46S, 75% x (£14 - £10) = 75% x £4 3

491 year amortisation 1

£48

11 H 120S, 75% x (£50 - £10) = 75% x £40 30

1502 years amortisation 2

£148

12 H + S = £263 + £200 = £463


14 H + S – Inter-Company = £120 + £140 - £26 = £234

15 H + S – Inter-Company = £90 + £60 - £26 = £124

16 H + S = £48 + £180 = £228

17 H only £180




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Now attempt the final case for this level of study. Case 10

The following are the draft Income and Expenditure accounts of H plc and S Ltd for the period to 31 December 20X9:

H plc S Ltd

£000 £000 £000 £000

Sales 500 300

Cost of Sales 300 180

Gross Profit 200 120

Operating Expenses 50 30

Amortisation of goodwill in S Ltd

Operating profit 150 90

Financing Costs 5 22

Profit before Tax 145 68

Taxation 30 18

Profit after Tax 115 50

Inter Company Dividends received 4

119

Non Controlling Interests

Group profit for year

Dividends paid 50 5

Retained profit for year 69 45

Retained profit brought forward 46 19

Retained profit carried forward 115 64



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The following are the draft Balance Sheets of H plc and S Ltd as at 31 December 20X9:

H plc S Ltd

£000 £000 £000 £000

Fixed Assets 263 264


Goodwill on Consolidation

363 Current Assets 120 140

Current Liabilities 90 60

30 80

393 344

Long Term Loans 48 180

345 164

Ordinary Share Capital £1 Shares 230 100

Profit and Loss Reserve 115 64

Non-Controlling Interests

345 164

Note:

H acquired 80% of S Ltd’s net assets for £100,000 one year ago when S’s shares stood at £100,000 and its profit and loss reserve at £19,000

Inter-company (IC) sales from S Ltd to H plc during the year were £175,000. There were no unsold stocks in relation to these transactions at the year end.The current assets of S include £32,000 owing from H and the current liabilities of H include £32,000 owing to S.

Any positive Goodwill arising on consolidation is amortised over its useful life, in this case considered to be five years. Negative goodwill, if any, is transferred to group profitand loss reserves.

Required: Prepare the group Income statement for the year ended 31 December 20X9 and a Group balance sheet as at that date.

Please show calculations to the nearest £1,000



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Solution: Group Income and Expenditure accounts of H plc and S Ltd for the period to 31 December 20X9:

H plc S Ltd Group

£000 £000 £000 £000 £000 £000 Note

Sales 500 300 625 1

Cost of Sales 300 180 305 2

Gross Profit 200 120 320

Operating Expenses 50 30 80 3Amortisation of goodwill in S Ltd 1 81 4

Operating profit 150 90 239

Financing Costs 5 22 27 5

Profit before Tax 145 68 212

Taxation 30 18 48 6

Profit after Tax 115 50 164

Inter Company Dividends received 4 7

119

Non Controlling Interests 10 8

Group profit for year 154

Dividends paid 50 5 50 9Retained profit for year 69 45 104

Retained profit brought forward 46 19 46 10

Retained profit carried forward 115 64 150 11



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Group Balance Sheet as at 31 December 20X9

H plc S Ltd Group

£000 £000 £000 £000 £000 £000 Note




363 531 Current Assets 120 140 228 14


30 80 110

393 344 641


345 164 413




345 164 413

Notes: £000

1 H + S – IC = £500 + £300 - £175 = £625

2 H + S – IC =£300 + £180 - £175 = £305

3 H + S = £50 + £30 = £80

4 For an acquisition costing 100

H acquired 80% of S, 80% x £119 = 95Goodwill acquired £5

Amortised over 5 years = £1

5 H + S = £5 + £22 = £27



30

£000

6 H + S = £30 + £18 = £48

7 From outside group only = £0

8 20% x £50 = £10

9 H plc only £50

10 H 46S, 80% x (£19 - £19) = 80% x £0 0

46No amortisation 0

£46

11 H 115S, 80% x (£64 - £19) = 80% x £45 36

1511 years amortisation 1

£150

12 H + S = £263 + £264 = £527

13 For an acquisition costing 100H acquired 80% of S, 80% x £119 = 95Goodwill acquired 5 amortised over 5 years = £1 per annumAmortised for 1 year 1Carrying value in Group balance sheet £4

14 H + S – Inter-Company = £120 + £140 - £32 = £228

15 H + S – Inter-Company = £90 + £60 - £32 = £118

16 H + S = £48 + £180 = £228

17 H only £230


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